A Study On The Validity Of The Optimal Asset Allocation Model

With the gradual deepening of China’s financial reform and gradual financial deregulation of the financial industry, the former separate operation barriers no longer exist. Large financial institutions, such as banking, securities, insurance, trust, have begun to compete with each other in the fields of asset management, marking China really into the "new asset management era”.Under the background stated above, previous experience dominated by traditional investment has not kept pace with the times, more concerned about the risk-return portfolio asset allocation strategy will play an extremely important role in the asset management of the new era.Since Markowitz published his paper about mean-variance model in 1952, research on asset allocation theory has been extensively studied and discussed by the western scholars. However, China’s shorter capital market development time and a relatively small number of institutional investors make asset allocation less important in China and asset allocation theory has long been neglected in the state.The purpose of this dissertation is to explore the usefulness of asset allocation model in the Chinese market. By using the China market data, numerous asset allocation models will be tested and the best asset allocation strategy willbeused directly in the Chinese asset management industry.The main innovation and conclusion of this dissertation are as follows:All kinds of static asset allocation models have been tested systematically at the first time in China. By using the monthly return of Chinese stock market, four portfolios with different sizes have been constructed to compare the out-of-sample performance of 10 different portfolio models. The researchindicates that the mean-variance model always has the worst performance among all the models considered. While the risk averse coefficient is lower, portfolios with shortsale constraints have the best performance. While the risk averse coefficient is higher, the mixed three_fund strategy perform best.In addition, none of the optimal models can deliver a Sharp ratio or a CEQ return that is significantly higher than of the naive portfolio.Following the newest research on asset allocation theory, the essay explores the impact of relaxing relative assumptions such as transaction costs, parameter uncertainty, multi-stage investors etc. In addition, two new trading strategies have been derived in the new quadratictrading cost and multi-period investor framework.The research indicates that the trading cost has significantly negative effects on the model performance, and the models with start portfolio equal to market portfolio perform better than the models with start portfolio equal to zero, while the multi-period models always have better performance than the static models. The multi-period mixed N_mv model has the best performance among all the models with transaction cost.To our knowledge, our paper is the first one to analyze the impact of hugangtong plocy, which was imposed by Chinese government in 2014 and allowed mainland Chinese investors to trade Hong Kong stocks. Using the data came from A-share and Hong Kong stock market, our paper tried to find out if the hugnagtong policy can improve the investment performance of Chinese mainland investors. Our results suggested that 1) investing the Hongkong stock market withtout hedging exchange rate will increase the return of investment when the riskfree interest rate equal to 0; 2) the hongkong index with hedging exchange rate will increase the return of investment when the risk-free interest rate is less than 0.0015.Moreover, we divided Hong Kong stock market into bull and bear markets by using Regime switch model separately, and quantified the performance difference when in bull or bear market. We found that when there is bear market in Hong Kong stock market, the Hong Kong market joining will increase the return of investment in any level of risk-free interest rate. However, there is no significant improvement when it is in a bear market. Similarly, we divided A share market in to bull and bear and found that the impact of the Hong Kong market joining on the return of investment will be positive only if the A share market is bull market and risk-free interest is zero...