Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2012-05-15
Number: 12-053/2/DSF34
Author-Name: Mahmoud Botshekan
Author-Email: m.botshekan@vu.nl
Author-Workplace-Name: VU University Amsterdam
Author-Name: Andre Lucas
Author-Email: a.lucas@vu.nl
Author-Workplace-Name: VU University Amsterdam, and Duisenberg school of finance
Title: Long-Term versus Short-Term Contingencies in Asset Allocation
Abstract: We determine the importance of long-term and short-term components of state variables for asset allocation decisions. The long-term and short-term decompositions are performed using a variety of filtering techniques. We allow for a flexible semiparametric form of the dependence of asset allocation decisions on state variable components. To account for short-sale restrictions, we extend the regular GMM moment conditions with the appropriate Lagrange-Kuhn-Tucker multipliers. Empirically, we find that investors can benefit from reacting differently to short-term versus long-term dynamics of state variables. The induced allocation decisions are implemented in an investment backtest. We find significant improvements in terms of out-of-sample Sharpe ratios and expected utilities for state variables such as the dividend yield and stock market trend.
Classification-JEL: G11
Keywords: Portfolio choice, long and short-term asset allocation, trend-cycle decomposition, GMM under short-sale constraints
File-Url: https://papers.tinbergen.nl/12053.pdf
File-Format: application/pdf
File-Size: 1035319 bytes
Handle: RePEc:tin:wpaper:20120053