TITLE:
The Effects of Systemic Risk on the Allocation between Value and Growth Portfolios
AUTHORS:
Gabriel Penagos, Gonzalo Rubio
KEYWORDS:
Systemic Risk; Value; Growth; Asset Allocation; Risk Aversion
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.3 No.1A,
March
29,
2013
ABSTRACT:
Given the striking effects of the recent financial turmoil, and the importance of value and growth portfolios for both local and international portfolio allocation, we investigate the effects of systemic jumps on the optimal portfolio investment strategies across value and growth equity portfolios. We find that the cost of ignoring systemic jumps is not substantial, unless the portfolio is highly levered and the average size amplitude of the jump is large enough. From the optimal asset allocation point of view, it seems more important the effects of few but relatively large jumps than highly frequent but small jumps. Indeed, the period in which the value premium is higher coincides with a period of few, but large and positive average size jumps for value stocks, and negative and very large average size jumps for growth stocks.