Optimal Investment Portfolio and Time‑Varying Risk Hedging: New Evidence from Currency, Stock, Gold Coin, and Housing Markets

Roudari, Soheil (2024): Optimal Investment Portfolio and Time‑Varying Risk Hedging: New Evidence from Currency, Stock, Gold Coin, and Housing Markets.

Abstract

One of the primary objectives of investors is to determine the optimal asset weights and the appropriate risk‑hedging strategies considering the holding period of each asset. Accordingly, this study examines and determines the optimal investment portfolio and the dynamic risk‑hedging relationships among currency, gold coin, housing, and stock markets over the period March 2006 to February 2023, employing a Time‑Varying Parameter Vector Autoregression (TVP‑VAR) model. The results indicate that stock and currency markets act as net transmitters, while gold coin and housing markets are net receivers of volatility within the examined network. The total connectedness index reveals that during periods of sanctions and the COVID‑19 pandemic, the interdependence among these markets intensified, thereby limiting diversification opportunities within the investment portfolio. Furthermore, cumulative returns under the Minimum Variance Portfolio (MVP) approach exceed those obtained under the Minimum Connectedness Portfolio (MCOP) framework. Based on the findings, the optimal combination involves holding stocks in the short run and housing in the long run. Out of one unit of investment under normal, bearish, and bullish market conditions, 0.97, 0.96, and 0.98 units, respectively, should be allocated to this combination. The study concludes that a static view of asset behavior is not appropriate for portfolio optimization. Instead, risk‑hedging and optimal asset weighting must be considered dynamically, reflecting economic, political, and health‑related conditions.

• Item Type: MPRA Paper
• Language: Persian
• Keywords: Hedging effectiveness, time‑varying optimal weights, asset markets
• Subjects: G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G1 - General Financial Markets > G17 - Financial Forecasting and Simulation; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill

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