Strategic Asset Allocation with Heterogeneous Beliefs

Thiago de Oliveira Souza

Working Papers ECARES from ULB -- Universite Libre de Bruxelles

Abstract: We study the presence of long term investors using different return forecasting strategies and switching them based on their past performance generates the price trends observed in financial markets. In the empirical section, we assume that investors choose how to allocate their portfoilios among four major stock indices: Dow Jones, FTSE, Nikkei and Hand Seng. The exercise shows that a decrease in the proportion of fundamentalists is related to movements in prices that are subsequentialy reverted. In this paper, we bridge the literatures on intertemporal asset allocation and on heterogeneous beliefs. The interaction between two switching types of agents, e.g. fundamentalists and chartists, is responsible for endogenously generating the observed price trends.

Keywords: asset pricing; intertemporal asset allocation; heterogeneous beliefs; adaptative learning (search for similar items in EconPapers)
JEL-codes: D83 D84 G11 G12 (search for similar items in EconPapers)
Pages: 43 p.
Date: 2010-12
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