A Seasonality Factor in Asset Allocation
40 Pages Posted: 5 Nov 2018 Last revised: 20 Mar 2019
Date Written: March 15, 2019
Motivated by the seasonality found in equity returns, we create a Turn-of-the-Month (ToM) allocation strategy in the U.S. equity market and investigate its value in asset allocation. By using a wide variety of portfolio construction techniques in an attempt to address the impact of estimation risk in the input parameters, we show significant out-of-sample benefits from investing in the ToM factor along with a traditional stock-bond portfolio. The out-of-sample benefits remain significant after taking into account transaction costs and by using different rolling estimation windows indicating that a market timing strategy based on the ToM offers substantial benefits to investors when determining the allocation of assets.
Keywords: asset allocation; turn-of-the-month; seasonality; timing; portfolio optimization
JEL Classification: G11, G12, G14, G15
Suggested Citation: Suggested Citation