The role of correlation dynamics in sector allocation

Elena Kalotychou, Sotiris K. Staikouras, Gang Zhao

Research output: Contribution to journalArticlepeer-review

15 Citations (SciVal)


This paper assesses the economic value of modeling conditional correlations for mean-variance portfolio optimization. Using sector returns in three major markets we show that the predictability of models describing empirical regularities in correlations such as time-variation, asymmetry and structural breaks leads to significant performance gains over the static covariance strategy. Investors would be willing to pay a fee of up to 983 basis points to switch from the static to the dynamic correlation portfolio and about 100 basis points more for capturing asymmetries and shifts in correlations. The gains are robust to the crisis, transaction costs and are most pronounced for monthly rebalancing.

Original languageEnglish
Pages (from-to)1-12
Number of pages12
JournalJournal of Banking and Finance
Early online date21 Jul 2014
Publication statusPublished - Nov 2014


  • Asymmetry
  • C32
  • C52
  • C53
  • Correlation timing
  • F21
  • G11
  • G15
  • Portfolio performance
  • Structural break
  • Transaction costs


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