Long-Term versus Short-Term Contingencies in Asset Allocation

Mahmoud Botshekan () and Andre Lucas
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Mahmoud Botshekan: VU University Amsterdam

Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We determine the importance of long-term and short-term components of state variables for asset allocation decisions. The long-term and short-term decompositions are performed using a variety of filtering techniques. We allow for a flexible semiparametric form of the dependence of asset allocation decisions on state variable components. To account for short-sale restrictions, we extend the regular GMM moment conditions with the appropriate Lagrange-Kuhn-Tucker multipliers. Empirically, we find that investors can benefit from reacting differently to short-term versus long-term dynamics of state variables. The induced allocation decisions are implemented in an investment backtest. We find significant improvements in terms of out-of-sample Sharpe ratios and expected utilities for state variables such as the dividend yield and stock market trend.

Keywords: Portfolio choice; long and short-term asset allocation; trend-cycle decomposition; GMM under short-sale constraints (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2012-05-15
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Related works:
Journal Article: Long-Term versus Short-Term Contingencies in Asset Allocation (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20120053

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