Asymmetric Risk And International Portfolio Choice

Susan Thorp andGeorge D Milunovich

Discussion by Stefano Mazzotta

Kennesaw State University

Second moment asymmetry• Volatilities and correlations for equity markets

rise more after negative returns shocks than after positive shocks.

• Research question: Is it possible to improve investor welfare taking into account asymmetries?

• The authors compute weights for international assets portfolios using predictions from asymmetric models, and predetermined “expected” returns.

Findings

Investors who are

• Moderately risk averse,• Have longer rebalancing horizons• Hold US equities

may be willing to pay around 100 basis points annually to switch from symmetric to

asymmetric forecasts.

Risk and Return

Strategy

• Estimate the second moment in several steps (DCC family of models).

• Test the second moment estimates with an array of possible means in mean variance portfolio setup.

Comments I

• What is it that makes international investment different?

• 1) Exchange risk

• 2) Integration/segmentation

None of these has a role in this paper.

Comments II

• How do the portfolio weights of the competing model compare?

• Can you say anything about the transaction cost under the different specifications?

Contribution

• Extend Engle and Colacito (2006) work to international assets.

• Implement the Fleming et al. (2001) to measure the economic value added by allowing for asymmetric volatility and correlation.