International asset allocation with time-varying investment opportunities

David Blake and Allan Timmermann

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper analyses the international equity holdings of a large panel of UK pension funds. We find considerable evidence of market timing activity, as illustrated by the funds' decision to scale back their investments in the US stock market during the 1990s. To explain this we model portfolio weight dynamics as a function of time-varying conditional moments. We find that a substantial part of the evolution in portfolio weights is explained by time-varying conditional expected returns, volatilities and covariances with domestic equity returns. Consequently, controlling for the effect of state variables that track time-variations in investment opportunities significantly affects estimates of returns from international market timing. Our estimates suggest that the portfolio movements that were orthogonal to such state variables accounted for a net loss of 0.2 per cent per annum for the average fund.

JEL-codes: F3 G3 J1 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2002-07
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Citations: View citations in EconPapers (2)

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http://eprints.lse.ac.uk/24944/ Open access version. (application/pdf)

Related works:
Journal Article: International Asset Allocation with Time-Varying Investment Opportunities (2005)
Working Paper: International Asset Allocation with Time-Varying Investment Opportunities (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:24944

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