MARC Record from Library of Congress

LEADER: 02497cam a22002897a 4500
001 2007615400
003 DLC
005 20070831102027.0
007 cr |||||||||||
008 070827s2007 mou sb f000 0 eng
010 $a 2007615400
040 $aDLC$cDLC
050 00 $aHB1
100 1 $aGuidolin, Massimo.
245 10 $aManaging international portfolios with small capitalization stocks$h[electronic resource] /$cby Massimo Guidolin, and Giovanna Nicodano.
260 $a[St. Louis, Mo.] :$bFederal Reserve Bank of St. Louis,$c[2007]
490 1 $aWorking paper ;$v2007-030A
538 $aSystem requirements: Adobe Acrobat Reader.
538 $aMode of access: World Wide Web.
500 $aTitle from PDF file as viewed on 8/27/2007.
530 $aAlso available in print.
504 $aIncludes bibliographical references.
520 3 $a"In the context of an international portfolio diversification problem, we find that small capitalization equity portfolios become riskier in bear markets, i.e. display negative co-skewness with other stock indices and high co-kurtosis. Because of this feature, a power utility investor ought to hold a well-diversified portfolio, despite the high risk premium and Sharpe ratios offered by small capitalization stocks. On the contrary small caps command large optimal weights when the investor ignores variance risk, by incorrectly assuming joint normality of returns. The dominant factor in inducing such shifts in optimal weights is represented by the co-skewness, the predictable, time-varying covariance between returns and volatilities. We calculate that if an investor were to ignore co-skewness and co-kurtosis risk, he would suffer a certainty-equivalent reduction in utility equal to 300 basis points per year under the steady-state distribution for returns. Our results are qualitatively robust when both European and North American small caps are introduced in the analysis. Therefore this paper offers robust evidence that predictable covariances between means and variances of stock returns may have a first order effect on portfolio composition"--Federal Reserve Bank of St. Louis web site.
653 $aintertemporal portfolio choice;$areturn predictability;$aco-skewness and co-kurtosis;$ainternational portfolio diversification
710 2 $aFederal Reserve Bank of St. Louis.
830 0 $aWorking paper (Federal Reserve Bank of St. Louis : Online) ;$v2007-030A.
856 40 $uhttp://research.stlouisfed.org/wp/more/2007-030/