Asset Allocation in Transition Economies

Eric Jondeau and Michael Rockinger ()

Working papers from Banque de France

Abstract: Designing an investment strategy in transition economies is a difficult task, because stock markets opened through time, time series are short, and there is little guidance how to obtain expected returns and covariance matrices necessary for mean-variance asset allocation. Moments of market returns can be expected to be time varying as structural changes occur in nascent market economies. We develop an ad-hoc optimal asset-allocation strategy with a flavor of Bayesian learning adapted to these various characteristics. Since an extreme event often heralds a new state of the economy, we re-initialize learning when unlikely returns materialize. By considering a Cornell benchmark, we show the usefulness of our strategy for certain types of re-initializations. Our model can also be used in situations when new industries emerge or when companies are subject to important restructuring.

Keywords: Emerging markets; mean-variance allocation; sequential Bayesian learning; structural breaks. (search for similar items in EconPapers)
JEL-codes: C11 C32 F30 G11 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2002
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Working Paper: Asset Allocation in Transition Economies (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:90

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