The impact of sectorial and geographical segmentation on risk-based asset allocation techniques

Abstract

In the last decades, risk-based portfolio construction techniques have enjoyed a widespread diffusion in the financial community. This study aims at evaluating how these portfolio construction techniques produce different results depending on whether the segmentation of the stock market investment universe is based on sectorial or geographical criteria. An empirical analysis, applied on the global equity market, is carried out by making use of the typical and most advanced statistical and financial evaluation measures. Geographical segmentation is carried out in relation to the listing market, while sectorial segmentation is made in relation to the productive sectors to which individual companies belong. Our comparative analysis provides substantially coherent results, demonstrating a significant preference for the sectorial criterion compared to the geographic one. In conclusion, this result can be attributed to the subdivision of the investment universe into sectorial indices characterized by greater internal coherence and better external differentiation, in addition to the lower concentration of sectorial segmentation compared to the geographical one.

Portfolio Constraints: An Empirical Analysis

“…Each one is composed of financial instruments that are as homogenous as possible and are exposed to distinct sources of systematic risk, such as macroeconomic and political factors. Moreover, these sectorial indices are very transparent and liquid, and they are characterized by greater internal coherence and better external differentiation than geographical ones, implying more dissimilar correlations (Basile et al 2019). These asset classes cover the entire investment universe.…”

Application of regression function model based on panel data in bank resource allocation financial risk management

“…In general, the contingent channel that links the two markets is the endogenous collapse mechanism of the financial market represented by 'real estate market prosperity-total loan supply increase-leverage ratio-FEt decline-long-term output decline'. It is recognised that the existence of the mortgage loan market results in the increase in the leverage ratio, which has led to a decline in the efficiency of financial resource allocation; and the decline in FEt means a decline in financial soundness [2].…”