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• W3125427822 abstract "We develop a new framework for multivariate intertemporal portfolio choice that allows us to derive optimal portfolio implications for economies in which the de gree of correlation across industries, countries, or asset classes is stochastic. Optimal portfolios include distinct hedging components against both stochastic volatility and correlation risk. We find that the hedging demand is typically larger than in univari ate models, and it includes an economically significant covariance hedging compo nent, which tends to increase with the persistence of variance-covariance shocks, the strength of leverage effects, the dimension of the investment opportunity set, and the presence of portfolio constraints. This paper develops a new multivariate modeling framework for intertempo ral portfolio choice under a stochastic variance-covariance matrix. We consider an incomplete market economy, in which stochastic volatilities and stochastic correlations follow a multivariate diffusion process. In this setting, volatili ties and correlations are conditionally correlated with returns, and optimal portfolio strategies include distinct hedging components against volatility and correlation risk. We solve the optimal portfolio problem and provide simple closed-form solutions that allow us to study the volatility and covariance hedg ing demands in realistic asset allocation settings. We document the importance of modeling the multivariate nature of second moments, especially in the con text of optimal asset allocation, and find that the optimal hedging demand can be significantly different from the one implied by more common models with constant correlations or single-factor stochastic volatility. An important thread within the asset pricing literature has documented the characteristics of the time variation in the covariance matrix of asset" @default.
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• W3125427822 date "2010-01-13" @default.
• W3125427822 modified "2023-10-10" @default.
• W3125427822 title "Correlation Risk and Optimal Portfolio Choice" @default.
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• W3125427822 doi "https://doi.org/10.1111/j.1540-6261.2009.01533.x" @default.
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