The macro-finance environment and asset allocation: A simultaneous equation approach

Antonio Moreno (), James Orlando and Dulce M. Redin

Finance Research Letters, 2016, vol. 18, issue C, 199-204

Abstract: We propose a novel methodology to identify latent factors influencing investment allocations in financial assets. By drawing logical paths in a structural equation model (SEM) framework, we uncover the role of a latent return factor that simultaneously shapes the dynamics of different financial assets. Our methodology allows for disentangling the different components of asset returns – those driven by fundamental and non-fundamental variables. We apply this methodology to Euro-area stocks and sovereign bonds over the 2003–2014 period. Lower economic and political uncertainty in Europe triggers a trade-off towards stocks and away from bonds, while U.S. Quantitative Easing boosts European stocks.

Keywords: Structural equation model; Asset allocation; Latent return factor; Europe (search for similar items in EconPapers)
JEL-codes: C30 G11 G12 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1544612316300575
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:18:y:2016:i:c:p:199-204

DOI: 10.1016/j.frl.2016.04.017

Access Statistics for this article

Finance Research Letters is currently edited by R. Gençay

More articles in Finance Research Letters from Elsevier
Bibliographic data for series maintained by Catherine Liu ().