An empirical study on tactical asset allocation and forecasting

Vivek Raj Rastogi, Niraj Kumar Vishvakarma and Joydip Dhar

International Journal of Economics and Business Research, 2012, vol. 4, issue 4, 393-411

Abstract: The central idea of this study is to analyse the moving average timing model that improves the risk-adjusted returns across various asset classes. This quantitative method tests Bombay Stock Exchange Index since 2000 on other diverse and publicly traded asset class indices, including the National Stock Exchange Index, Gold Index, Housing Development Finance Corporation Limited Mutual Fund Index and INR-Dollar Exchange Rates Index. This approach is then examined in a tactical asset allocation framework where the empirical results are equity-like returns with volatility, Sharpe ratio and drawdown. In this research, we also compared the forecasting performance of autoregressive moving average (ARMA) and exponential generalised autoregressive conditional heteroskedasticity-autoregressive moving average (EGARCH-ARMA) for the defined asset classes. Daily spot prices of all these composite indices provide the empirical sample for discussing and comparing the relative out-of-sample forecasting ability, given the growth potential of markets of India in the eyes of global investors. Empirical results indicate that the EGARCH-ARMA model is superior to the ARMA model in forecasting market returns. Several diagnostic tests were performed to select the models that best fit the index such as likelihood ratio test, Akaike and Bayesian information criteria tests and autocorrelation and partial autocorrelation tests.

Keywords: moving average timing model; tactical asset allocation; annualised returns; Sharpe ratio; reward-to-variability ratios; William Forsyth Sharpe; ARMA; autoregressive-moving-average; EGARCH; exponential general autoregressive conditional heteroskedastic; risk-adjusted returns; asset classes; Bombay Stock Exchange Index; India; publicly traded assets; asset class indices; National Stock Exchange Index; Gold Index; Housing Development Finance Corporation Limited Mutual Fund Index; INR-Dollar Exchange Rates Index; rupee; currencies; equity-like returns; volatility; forecasting performance; daily prices; spot prices; composite indices; relative forecasting ability; out-of-sample forecasting ability; growth potential; Indian markets; global investors; empirical results; market returns; diagnostic tests; drawdown; likelihood ratio tests; Hirotsugu Akaike; information criterion; Bayesian information criteria; Thomas Bayes; autocorrelation tests; partial autocorrelation tests; economics; business research. (search for similar items in EconPapers)
Date: 2012
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