• Please log in or register to access this feature.

Research Article

Asset allocation under threshold autoregressive models

  1. Na Song1,*,
  2. Tak Kuen Siu2,†,
  3. Wa-Ki Ching1,
  4. Howell Tong3,‡,
  5. Hailiang Yang4,§

Article first published online: 29 APR 2011

DOI: 10.1002/asmb.897

Issue

Applied Stochastic Models in Business and Industry

Applied Stochastic Models in Business and Industry

Volume 28, Issue 1, pages 60–72, January/February 2012

Additional Information

How to Cite

Song, N., Siu, T. K., Ching, W.-K., Tong, H. and Yang, H. (2012), Asset allocation under threshold autoregressive models. Appl. Stochastic Models Bus. Ind., 28: 60–72. doi: 10.1002/asmb.897

Author Information

  1. 1

    Advanced Modeling and Applied Computing, Department of Mathematics, The University of Hong Kong, Hong Kong, Hong Kong

  2. 2

    Department of Actuarial Studies and Center of Financial Risk, Faculty of Business and Economics, Macquarie University, Sydney, Australia

  3. 3

    London School of Economics, U.K.

  4. 4

    Department of Statistics and Actuarial Science, The University of Hong Kong, Pokfulam Road, Hong Kong

  1. †

    Associate Professor.

  2. ‡

    Chair Professor of Statistics.

  3. §

    Professor of Actuarial Science.

*Advanced Modeling and Applied Computing, Department of Mathematics, The University of Hong Kong, Hong Kong, Hong Kong

  1. †

    Associate Professor.

  2. ‡

    Chair Professor of Statistics.

  3. §

    Professor of Actuarial Science.

Publication History

  1. Issue published online: 10 FEB 2012
  2. Article first published online: 29 APR 2011
  3. Manuscript Revised: 27 FEB 2011
  4. Manuscript Accepted: 27 FEB 2011
  5. Manuscript Received: 7 MAY 2010

SEARCH

SEARCH BY CITATION

ARTICLE TOOLS

View Full Article (HTML) Get PDF (1572K)

Keywords:

  • asset allocation;
  • SETAR model;
  • STAR model;
  • non-linearity;
  • conditional heteroscedasticity;
  • dynamical programming;
  • stochastic dynamical system

We discuss the asset allocation problem in the important class of parametric non-linear time series models called the threshold autoregressive model in (J. Roy. Statist. Soc. Ser. A 1977; 140:34–35; Patten Recognition and Signal Processing. Sijthoff and Noordhoff: Netherlands, 1978; and J. Roy. Statist. Soc. Ser. B 1980; 42:245–292). We consider two specific forms, one self-exciting (i.e. the SETAR model) and the other smooth (i.e. the STAR) model developed by Chan and Tong (J. Time Ser. Anal. 1986; 7:179–190). The problem of maximizing the expected utility of wealth over a planning horizon is considered using a discrete-time dynamic programming approach. This optimization approach is flexible enough to deal with the optimal asset allocation problem under a general stochastic dynamical system, which includes the SETAR model and the STAR model as particular cases. Numerical studies are conducted to demonstrate the practical implementation of the proposed model. We also investigate the impacts of non-linearity in the SETAR and STAR models on the optimal portfolio strategies. Copyright © 2011 John Wiley & Sons, Ltd.

View Full Article (HTML) Get PDF (1572K)