Research On Asset Allocation Of Chinese Investors In Global Markets

This article focuses on several important topics that a Chinese investor will meet in global portfolio investment.The first one is why a Chinese investor should extend his/her investment opportunities to the glabal markets. This topic is discussed from the view of theory and practice. First, for an individual investor, he/she can improve the proformance of risk management through global portfolio management. Second, for Chinese economy, it is helpful to improve the quality of development in currenct sconomic and financial environment.The second one is the asset allocation policy in global markets. Two diversification methods, market diversification and sector diversification, are tested. The results indicate that if a Chinese investor adds foreign assets into his/her domestic portfolio, the total performance, i.e. the risk-return feature, of the portfolio can be improved greatly. And as the correlations between major markets are increasing, markets diversification and sector diversification should be integrated in asset allocation.The third topic is related to the application of dynamic asset allocation model in international asset allocation. The multistage asset allocation model based on stochastic programming method is introduced, and used to analyze performances of several international portfolios. The empirical tests show that the mentioned multistage allocation model is an effective tool in global asset allocation. However, its effect is impacted by some factors, especially the scenario generation model. The analysis using multistage allocation model on performances of different international portfolios denotes that the portfolio of "Chinese market index + Global sector indices" has the best performance in currenct environment.Reseaching the dynamic correlations between assets is one of the preconditions of applying dynamic asset allocation in global markets effectively. The international correlations of Chinese markets and the correlations between assets in global markets under different return rate levels or different volatility levels are tested. The results show that the international correlation of Chinese market is increasing in recent years, while the differences among sectors are more and more significant. The correlations between assets in global markets change in different conditions. Both in developed markets or emerging markets, when the return rate is in low level, the correlation is in high level. In addition, the comovement exists in correlations to some extent, i.e. when the volatility of one asset increases, the correlation between the two assets also increases. However, the empirical results also show that if commodities are included in portfolios, the dynamic relations of assets in a portfolio may be improved, which leads to higher asset allocation performance.Currency risk emerges when an investor extended his/her investment opportunity set abroad. The effect of currency risk control is discussed in this article from the views of an investor holding US dollar, RMB, or currencies of some Asian emerging markets respectively. It is indicated that the effects of currency risk hedging are different in different markets, and it will be more reduced under too strict constructions. For a Chinese investor, if he/she focuses on developed markets, the currency risk does not impact on his/her investment performance significantly in currenct RMB exchange regime, except for an extreme risk aversion people. This result is also effective for an investor holding currency of Singapore, South Korea, or Taiwan. The mentioned result is derived from the negative correlations between currencies and assets in developed markets, which reduce the impact of currency risk in long term. So it implies that for a Chinese investor, currency risk will not bother him/her very much even if the RMB exchange regime is more freely.Finally, it is discussed how to apply related models and research results in practical asset allocation, with introduction of "International Asset Allocation Tesing Platform" (IAATP). The possible problems may be met in design and implement of dynamic asset allocation system are also discussed.