The Effects of Systemic Risk on the Allocation between Value and Growth Portfolios
- 1 Departamento de Economía y Empresa, Universidad CEU Cardenal Herrera, Valencia, Spain
- 2 Departamento de Economía y Empresa, Universidad CEU Cardenal Herrera, Valencia, Spain
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 in vestment 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.
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