The Financial Econometrics Seminar: 
Time: 10:30 pm
Date: 07th of February 2023
Room 3001

Arthur Thomas (Université Paris Dauphine & CREST) “Bet on Bubble Asset ? an Optimal Portfolio Allocation Strategy”

Abstract :

We discuss portfolio allocation when one asset exhibits phases of locally explosive behavior. We model the conditional distribution of such an asset through mixed causal-non-causal models which mimic well the speculative bubble behaviour. Relying on a Taylor-series-expansion of a CRRA utility function approach, the optimal portfolio(s) is(are) located on the mean-variance-skewness-kurtosis efficient surface. We analytically derive these four conditional moments and show in a Monte-Carlo simulations exercise that incorporating them into a two-assets portfolio optimization problem leads to substantial improvement in the asset allocation strategy. All performance evaluation metrics support the higher out-of-sample performance of our investment strategies over standard benchmarks such as the mean-variance and equally-weighted portfolio. An empirical illustration using the Brent oil price as the speculative asset confirms these findings.

Joint work : Gilles de Truchis, Elena-Ivona Dumitrescu, Sébastien Fries

Organizers:

Jean-Michel ZAKOIAN  (CREST)

Sponsors:
CREST