New Evidence on Optimal Asset Allocation

Posted: 6 May 2003

See all articles by Gerald R. Jensen

Gerald R. Jensen

Northern Illinois University

Jeffrey M. Mercer

Texas Tech University - Department of Finance

Abstract

Brocato and Steed (1998) showed that portfolio rebalancing based on NBER business cycle turning points substantially improves in-sample Markowitz efficiency. In a similar vein, we investigate potential improvements from rebalancing based on turning points in the monetary cycle. We find that the monetary cycle has greater influence than the business cycle on the variance/covariance structure of multiple asset classes. Furthermore, we find substantial improvements in in-sample efficiency beyond a buy-and-hold strategy and the business-cycle approach. Importantly, our indicator of monetary cycle turning points has a practical advantage over NBER business cycle turning points, in that it relies only on ex ante information. In out-of-sample tests, we continue to find superior portfolio performance after transactions costs using the monetary cycle to time portfolio rebalancing.

Suggested Citation

Jensen, Gerald and Mercer, Jeffrey M., New Evidence on Optimal Asset Allocation. Available at SSRN: https://ssrn.com/abstract=395922

Gerald Jensen

Northern Illinois University ( email )

Barsema Hall
Finance Department
DeKalb, IL 60115
United States
815-753-6399 (Phone)

Jeffrey M. Mercer (Contact Author)

Texas Tech University - Department of Finance ( email )

Rawls College of Business Administration
Lubbock, TX 79409
United States
806-742-3365 (Phone)
806-742-3197 (Fax)

HOME PAGE: http://jmercer.ba.ttu.edu/

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