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International Asset Allocation with Time-Varying Investment Opportunities

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  • Blake, David
  • Timmermann, Allan G

Abstract

This paper analyses the international equity holdings of a large panel of UK pension funds. We find considerable evidence of market timing activity, as illustrated by the funds' decision to scale back their investments in the US stock market during the 1990s. To explain this we model portfolio weight dynamics as a function of time-varying conditional moments. We find that a substantial part of the evolution in portfolio weights is explained by time-varying conditional expected returns, volatilities and covariances with domestic equity returns. Consequently, controlling for the effect of state variables that track time-variations in investment opportunities significantly affects estimates of returns from international market timing. Our estimates suggest that the portfolio movements that were orthogonal to such state variables accounted for a net loss of 0.2 per cent per annum for the average fund.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3464.

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Date of creation: Jul 2002
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Handle: RePEc:cpr:ceprdp:3464

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Keywords: international asset allocation; investment performance; market timing; UK pension funds;

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Cited by:
  1. Blake, David & Timmermann, Allan & Tonks, Ian & Wermers, Russ, 2010. "Decentralized investment management: evidence from the pension fund industry," MPRA Paper 35767, University Library of Munich, Germany.
  2. Moosa, Imad A. & Al-Deehani, Talla M., 2009. "The Myth of International Diversification," Economia Internazionale / International Economics, Camera di Commercio di Genova, vol. 62(3), pages 383-406.
  3. Kamel Laaradh, 2007. "« Investir Sur Le Marche Inernational Des Actions A-T-Il Plus D'Effet Sur La Persistance De La Performance Des Fonds ? Illustration Britannique »," Post-Print halshs-00544930, HAL.
  4. Manuel Ammann & Andreas Zingg, 2008. "Investment Performance of Swiss Pension Funds and Investment Foundations," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 144(II), pages 153-195, June.
  5. Blake, David & Cairns, Andrew & Dowd, Kevin, 2008. "Turning pension plans into pension planes: What investment strategy designers of defined contribution pension plans can learn from commercial aircraft designers," MPRA Paper 33749, University Library of Munich, Germany.
  6. Albuquerque, Rui & Bauer, Gregor H & Schneider, Martin, 2006. "Global Private Information in International Equity Markets," CEPR Discussion Papers 5819, C.E.P.R. Discussion Papers.
  7. Nadima El-Hassan & Paul Kofman, 2003. "Tracking Error and Active Portfolio Management," Australian Journal of Management, Australian School of Business, vol. 28(2), pages 183-207, September.
  8. Gabriele Zinna, 2014. "Price pressures in the UK index-linked market: an empirical investigation," Temi di discussione (Economic working papers) 968, Bank of Italy, Economic Research and International Relations Area.
  9. Fernandez, Pablo & Aguirreamalloa, Javier & Corres, Luis, 2012. "Rentabilidad de los Fondos de Pensiones en España. 2001-2011," IESE Research Papers D/947, IESE Business School.
  10. Rui Albuquerque & Gregory Bauer & Martin Schneider, 2004. "Characterizing Asymmetric Information in International Equity Markets," International Finance 0405005, EconWPA.

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