Abstract
We analyze a global equity return model driven by mutually exciting jump-diffusions with asymmetric excitation to account for the fact that crashes in the US get reflected quickly in other economies but much less the other way round. We solve in closed-form the associated portfolio optimization problem and find that the optimal portfolio is biased towards the US compared to classic models. By calibrating the model to historical returns on the US, Japanese, and European equity indices, we show that the over-exposure to the US equity predicted by our model is consistent with the cross-border equity portfolios observed in reality.
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