Statistics Seminar: David Allen (The University of Sydney and the University of South Australia) -- European Market Portfolio Diversification Strategies across the GFC

Note: David Allen has been appointed as visiting professor/scholar in our group 
from 2013 and wanted his dual affiliation stated in this scnews item. Apologies 
for the second positng.

Abstract:

This paper features an analysis of the eeffectiveness of a range of portfolio
diversification strategies as applied to a set of daily arithmetically compounded
returns on a set of ten market indices representing the major European markets
for a nine year period from the beginning of 2005 to the end of 2013. The
sample period, which incorporates the periods of both the Global Financial Crisis
(GFC) and subsequent European Debt Crisis (EDC), is challenging one for the
application of portfolio investment strategies. The analysis is undertaken via the
examination of multiple investment strategies and a variety of hold-out periods
and back-tests. We commence by using four two year estimation periods and
subsequent one year investment hold out period, to analyze a naive 1/N
diversification strategy, and to contrast its eeffectiveness with Markowitz mean
variance analysis with positive weights. Markowitz optimization is then compared
with various down-side investment optimization strategies.

We begin by comparing Markowitz with CVaR, and then proceed to evaluate the
relative eeffectiveness of Markowitz with various draw-down strategies, utilizing
a series of backtests. Our results suggest that none of the more sophisticated
optimization strategies appear to dominate naive diversification.

Keywords:
Portfolio Diversication, Markowitz Analaysis, Downside Risk, CVaR, Draw-down
  

**Joint work with**

(a) Michael McAleer , (b) Robert J. Powellc , and (c) Abhay K. Singh

(a): Department of Quantitative Finance National Tsing Hua University Taiwan and
Econometric Institute Erasmus School of Economics Erasmus University Rotterdam and
Tinbergen Institute The Netherlands and Department of Quantitative Economics
Complutense University of Madrid
(b,c): School of Accounting, Finance and Economics, Edith Cowan University, Australia