Macroeconomic Influences on Optimal Asset Allocation

Michael Wickens and Thomas Flavin

No 3144, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We develop a tactical asset allocation strategy that incorporates the effects of macroeconomic variables. The joint distribution of financial asset returns and the macroeconomic variables is modelled using a VAR with an M-GARCH error structure. As a result the portfolio frontier is time varying and subject to contagion from the macroeconomic variable. Optimal asset allocation requires that this be taken into account. We illustrate the how to do this using three risky UK assets and inflation as a macroeconomic factor. Taking account of inflation generates portfolio frontiers that lie closer to the origin, and offers investors superior risk-return combinations.

Keywords: Asset allocation; Macroeconomic effects; Multivariate garch (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2002-01
New Economics Papers: this item is included in nep-cfn and nep-mac
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Citations: View citations in EconPapers (3)

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