Macro-Based Parametric Asset Allocation

38 Pages Posted: 4 May 2013 Last revised: 13 Dec 2013

Richard Franz

Vienna University of Economics and Business

Date Written: December 13, 2013

Abstract

This paper presents a novel approach to asset class allocation which builds upon macroeconomic factors. Without doubt the financial returns of asset classes are interlinked with the economy. However, it is not clear how to bring the finance and economy world together within a portfolio's asset allocation. I propose a direct modeling of the weights with global macroeconomic risk factors. These risk factors are not asset class specific but potentially related to the returns of all asset classes. In this paper I focus on three asset classes: stocks, bonds and the risk free asset. The approach is robust, links macroeconomic factors to financial returns intuitively and outperforms a standard 60% stock and 40% bond portfolio almost twice in terms of the Sharpe Ratio - in sample and out of sample. This outperformance largely remains when considering transaction or leverage costs.

Keywords: asset allocation, macro based, parametric weights

JEL Classification: G10, G11, G17

Suggested Citation

Franz, Richard, Macro-Based Parametric Asset Allocation (December 13, 2013). Available at SSRN: https://ssrn.com/abstract=2260179 or http://dx.doi.org/10.2139/ssrn.2260179

Richard Franz (Contact Author)

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, 1020
Austria
+43 1 51818 545 (Phone)

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