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Macroeconomic influences on optimal asset allocation

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  • Flavin, T. J.
  • Wickens, M. R.

Abstract

We develop a tactical asset allocation strategy that incorporates the effects of macroeconomic variables. The joint distribution of financial asset returns and the macroeconomic variables is modelled using a VAR with an M-GARCH error structure. As a result the portfolio frontier is time varying and subject to contagion from the macroeconomic variable. Optimal asset allocation requires that this be taken into account. We illustrate the how to do this using three risky UK assets and inflation as a macroeconomic factor. Taking account of inflation generates portfolio frontiers that lie closer to the origin, and offers investors superior risk-return combinations.

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Bibliographic Info

Article provided by Elsevier in its journal Review of Financial Economics.

Volume (Year): 12 (2003)
Issue (Month): 2 ()
Pages: 207-231

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Handle: RePEc:eee:revfin:v:12:y:2003:i:2:p:207-231

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Web page: http://www.elsevier.com/locate/inca/620170

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Cited by:
  1. Boris Georgiev, 2014. "Constrained Mean-Variance Portfolio Optimization with Alternative Return Estimation," Atlantic Economic Journal, International Atlantic Economic Society, vol. 42(1), pages 91-107, March.
  2. Massimo Guidolin & Sadayuki Ono, 2005. "Are the dynamic linkages between the macroeconomy and asset prices time-varying?," Working Papers 2005-056, Federal Reserve Bank of St. Louis.
  3. Alexis Derviz & Narcisa Kadlcáková, 2005. "Business cycle, credit risk and economic capital determination by commercial banks," BIS Papers chapters, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 299-327 Bank for International Settlements.
  4. Beltratti, A. & Morana, C., 2006. "Breaks and persistency: macroeconomic causes of stock market volatility," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 151-177.
  5. Jan Brùha & Alexis Derviz, 2006. "Macroeconomic Factors and the Balanced Value of the Czech Koruna/Euro Exchange Rate (in English)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 56(7-8), pages 318-343, July.

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