Long-Term Strategic Asset Allocation: An Out-of-Sample Evaluation

41 Pages Posted: 14 Jul 2009 Last revised: 6 Feb 2014

See all articles by Bart F. Diris

Bart F. Diris

Erasmus University Rotterdam (EUR) - Department of Econometrics; Netspar

Franz C. Palm

University of Maastricht - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Peter C. Schotman

Maastricht University - Department of Finance

Date Written: February 5, 2014

Abstract

We evaluate the out-of-sample performance of a long-term investor who follows an optimized dynamic trading strategy. Although the dynamic strategy is able to benefit from predictability out-of-sample, a short-term investor using a single period market timing strategy would have realized an almost identical performance. The value of intertemporal hedge demands in strategic asset allocation appears negligible. The result is caused by the estimation error in predicting the predictors. A myopic investor only needs to predict one-period ahead expected returns, but hedge demands also require accurate predictions of the predictor variables. To reduce the problem of errors in optimized portfolio weights we consider Bayesian procedures. Myopic and dynamic portfolios are similarly affected by such modifications and differences in performance become even smaller.

The appendices for this paper are available at the following URL: http://ssrn.com/abstract=1973648

Keywords: Strategic asset allocation, out-of-sample analysis

JEL Classification: G11, C53, C22

Suggested Citation

Diris, Bart Franciscus and Diris, Bart Franciscus and Palm, Franz C. and Schotman, Peter C., Long-Term Strategic Asset Allocation: An Out-of-Sample Evaluation (February 5, 2014). Available at SSRN: https://ssrn.com/abstract=1107840 or http://dx.doi.org/10.2139/ssrn.1107840

Bart Franciscus Diris (Contact Author)

Erasmus University Rotterdam (EUR) - Department of Econometrics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Franz C. Palm

University of Maastricht - Department of Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31-(0)43-3883833 (Phone)
+31-(0)43-3258535 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.cesifo.de

Peter C. Schotman

Maastricht University - Department of Finance ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31 43 388 3862 (Phone)
+31 43 388 4875 (Fax)

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