Applying the Modern Asset Allocation and Smart-Beta Models to the Securities Markets of Mainland China Hong Kong and Taiwan

Abstract

In this paper we will explore the application of the MAA (modern asset allocation) models to the securities markets of Greater China (including Mainland China Hong Kong and Taiwan) In our first step we introduce the evolution of Modern Portfolio Theory (Markowitz 1952) to the Modern Asset Allocation Model (Keller et al 2013 and 2014) and we illustrate the main difference between “strategic and “tactical” asset allocation As in our second step we get the basic MAA model by using the single index model (Elton et al 1976) to arrive at an analytical solution for a long-only maximum Sharpe allocation In our third step we use shrinkage estimators in our formula for asset returns volatilities and correlations to arrive at practical allocations In addition as a special cases we arrive at Minimum Variance (MV) Maximum Diversification (MD) and EW (Equal Weight) and the EW model is our benchmark model These MV MD EW models are sometimes called “smart-beta” models Finally we apply the different models to the stock index ETFs bond index ETFs and REITs of Mainland China Hong Kong and Taiwan with the daily data from Jan 2006 to Feb 2015 monthly rebalanced The empirical results show that MAA models beat other models consistently on various return /risk criteria with the general smart-beta models (with return momentum) also beating the EW model

Date of Award	2015 Jul 1
Original language	English
Supervisor	Meng-Feng Yen (Supervisor)