A Quantitative Approach to Faber's Tactical Asset Allocation

Abstract

Routinely, practictioners and academics alike propose the use of trading strategies with an alleged improvement on the risk-return relation, tipically entailing a considerably higher return for the given level of risk. A very popular example is "A quantitative approach to tactical asset allocation'' by the fund manager M. Faber, a real hit in the SSRN online library. Is this paper a counterexample to market efficiency? We reject this conclusion, showing that a lot of caution should be used in this field, and we indicate a series of bootstrapping experiments which can be easily implemented to evaluate the performance of trading strategies.

Keywords: market efficiency, portfolio selection, bootstrap

JEL Classification: G11