New evidence on optimal asset allocation

Gerald R. Jensen, Jeffrey M. Mercer

Research output: Contribution to journalArticle

13 Scopus citations

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.

Original languageEnglish
Pages (from-to)435-454
Number of pages20
JournalFinancial Review
Volume38
Issue number3
DOIs
StatePublished - Aug 2003

Keywords

  • Asset allocation
  • Markowitz efficiency
  • Variance/covariance structure

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