Systemic risk and international portfolio choice, Working paper

Systemic risk and international portfolio choice, Working paper (2003)

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by Sanjiv Ranjan Das , Pierluigi Balduzzi , Suleyman Basak , Greg Bauer , Geert Bekaert , Harjoat Bhamra , Michael Br , John Campbell , George Chacko , João Cocco , Glen Donaldson , Darrell Duffie , Bernard Dumas , Francisco Gomes , Eric Jacquier , Tim Johnson , Andrew Karolyi , Andrew Lo , Michelle Lee , Scott Mayfield , Narayan Naik , Vasant Naik , Roberto Rigobon , Geert Rouwenhorst , Milind Shrikh , Rob Stambaugh , Raghu Sundaram , Luis Viceira , Jiang Wang , Tan Wang , Greg Willard , Wei Xiong

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@MISC{Das03systemicrisk,
    author = {Sanjiv Ranjan Das and Pierluigi Balduzzi and Suleyman Basak and Greg Bauer and Geert Bekaert and Harjoat Bhamra and Michael Br and John Campbell and George Chacko and João Cocco and Glen Donaldson and Darrell Duffie and Bernard Dumas and Francisco Gomes and Eric Jacquier and Tim Johnson and Andrew Karolyi and Andrew Lo and Michelle Lee and Scott Mayfield and Narayan Naik and Vasant Naik and Roberto Rigobon and Geert Rouwenhorst and Milind Shrikh and Rob Stambaugh and Raghu Sundaram and Luis Viceira and Jiang Wang and Tan Wang and Greg Willard and Wei Xiong},
    title = {Systemic risk and international portfolio choice, Working paper},
    year = {2003}
}

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Abstract

Returns on international equities are characterized by jumps; moreover, these jumps tend to occur at the same time across countries leading to systemic risk. We capture these stylized facts using a multivariate system of jump-diffusion processes where the arrival of jumps is simultaneous across assets. We then determine an investor’s optimal portfolio for this model of returns. Systemic risk has two effects: One, it reduces the gains from diversification and two, it penalizes investors for holding levered positions. We find that the loss resulting from diminished diversification is small, while that from holding very highly levered positions is large. 1 Returns on international equities are characterized by jumps; 1 moreover, these jumps tend to occur at the same time across countries, implying that conditional correlations between

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