Asset allocation in markets with contagion: The interplay between volatilities,jump intensities,and correlations |
| |
Authors: | Patrick Konermann Christoph Meinerding Olga Sedova |
| |
Affiliation: | 1. Finance Center Muenster, University of Muenster, Universitaetsstr. 14‐16, 48143 Muenster, Germany;2. Finance Department, Goethe University, House of Finance, Grueneburgplatz 1, 60323 Frankfurt, Germany |
| |
Abstract: | We study the impact of financial contagion on the dynamic asset allocation problem of a CRRA investor facing an incomplete market with two risky assets. We apply a Markov chain regime-switching framework with state-dependent jump intensities, diffusion volatilities and diffusion correlations. The key model feature that a switch to the bad contagion regime is triggered by a loss in one of the risky assets allows for the implementation of a hedging demand against contagion risk. Moreover, a state-dependent diffusion correlation combined with heterogeneity in jump intensities and volatilities can, e.g., generate a flight to quality effect upon a systemic jump. |
| |
Keywords: | G01 G11 Asset allocation Portfolio choice Contagion Systemic risk Regime switching |
本文献已被 ScienceDirect 等数据库收录! |
|