Examination of Time-Variant Asset Correlations Using High- Frequency Data
By Mingwei Lei
Drawing motivation from the 2007-2009 global financial crises, this paper looks to further examine the potential time-variant nature of asset correlations. Specifically, high frequency price data and its accompanying tools are utilized to examine the relationship between asset correlations and market volatility. Through further analyses of this relationship using linear regressions, this paper presents some significant results that provide striking evidence for the time-variability of asset correlations. These findings have crucial implications for portfolio managers as well as risk management professionals alike, especially in the contest of diversification.
Advisor: George Tauchen | JEL Codes: G, G1, G10, G11, G14 | Tagged: Asset correlations, Diversification, Financial Crisis, High-Frequency Data, Market Volatility, Time-Variant Correlations, Time-Variant Volatility
Volatility and Correlation Modeling for Sector Allocation in International Equity Markets
By Melanie Fan
Reliable estimates of volatility and correlation are crucial in asset allocation and risk management. This paper investigates Static, RiskMetrics, and Dynamic Conditional Correlation (DCC) models for estimating volatility and correlation by testing them in an asset allocation context. Optimal allocation weights for one year found using estimates from each model are carried to the subsequent year and the realized Sharpe ratio is computed to assess portfolio performance. We also study cumulative risk-adjusted returns over the entire sample period. Our ndings indicate that DCC does not consistently have an advantage over the other two models, although it is optimal in certain scenarios.
Advisor: Aino Levonmaa, Emma Rasiel | JEL Codes: C32, C51, G11, G15 | Tagged: Asset Allocation, Dynamic Correlation, Emerging Markets, Volatilita
Do Vanguard ETF Investors Make Good Decisions? – Testing the Bogle Hypothesis
By Meng Xie
John Bogle, the founder of Vanguard, is a notable opponent of frequent ETF trading. We test his
hypothesis that Vanguard investors are not trading ETFs intelligently. A comparison of dollarweighted
and time-weighted returns is the typical method used for assessing investor timing. We
instead employ Sharpe’s style analysis techniques to compare the returns of a portfolio of ETFs
to a basket of standard Vanguard funds that mimics the ETF portfolio’s pattern of returns. We
find that the ETF portfolio underperforms the standard Vanguard funds, providing empirical
evidence supporting Bogle’s view that ETFs are misused.
Advisor: Edward Tower | JEL Codes: G11 | Tagged: Exchange-traded funds, Investment, Mutual funds, Vanguard
