Towards a Better Fed Model

33 Pages Posted: 3 Dec 2020 Last revised: 5 Dec 2020

Date Written: October 4, 2020

Abstract

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

Micaletti, Raymond, Towards a Better Fed Model (October 4, 2020). Available at SSRN: https://ssrn.com/abstract=3704963 or http://dx.doi.org/10.2139/ssrn.3704963

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