Towards a Better Fed Model
33 Pages Posted: 3 Dec 2020 Last revised: 5 Dec 2020
Date Written: October 4, 2020
We present an alternative to the widely known and much-maligned "Fed model." The proposed alternative makes a coherent comparison between equities and bonds that eliminates the theoretical and empirical flaws of the original (as well as any need for ad hoc asset-class volatility adjustments). The output of the model is a time-series value factor, which is then used to develop a tactical asset allocation strategy. Historical simulations suggest the resulting strategy is superior not only to the original Fed model, but to tactical strategies based on other popular time-series value factors as well. Beyond its forecasting and tactical allocation performance, the proposed model also provides significant insight into equity market dynamics--insight that has been validated by recent historical events.
Keywords: Fed model, tactical asset allocation, market timing, investor sentiment, equity valuation, time-series value
JEL Classification: G10, G11, G14, G17
Suggested Citation: Suggested Citation