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- Title
New Evidence on Optimal Asset Allocation.
- Authors
Jensen, Gerald R.; Mercer, Jeffrey M.
- Abstract
Abstract Brocato and Steed (1998) showed that portfolio rebalancing based on NBER business cycle turning points substantially improves in-sample Markowitz efficiency. In a similar vein, we investigate potential improvements from rebalancing based on turning points in the monetary cycle. We find that the monetary cycle has greater influence than the business cycle on the variance/covariance structure of multiple asset classes. Furthermore, we find substantial improvements in in-sample efficiency beyond a buy-and-hold strategy and the business-cycle approach. Importantly, our indicator of monetary cycle turning points has a practical advantage over NBER business cycle turning points, in that it relies only on ex ante information. In out-of-sample tests, we continue to find superior portfolio performance after transactions costs using the monetary cycle to time portfolio rebalancing.
- Subjects
ASSET allocation; PORTFOLIO management (Investments); INVESTMENTS; ANALYSIS of covariance; REGRESSION analysis; BUSINESS cycles
- Publication
Financial Review, 2003, Vol 38, Issue 3, p435
- ISSN
0732-8516
- Publication type
Article
- DOI
10.1111/1540-6288.00054