Portfolio allocation under asymmetric dependence in asset returns using local Gaussian correlations

It is well known that there are asymmetric dependence structures between financial returns. This paper describes a portfolio selection method rooted in the classical mean–variance framework incorporates such dependency using nonparametric measure of local dependence, Gaussian correlation (LGC). shown optimization process for returns with straightforward covariance matrices. The new to outperform equally weighted (“1/N”) and Markowitz when applied historical data on six assets.