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Strategic Asset Allocation with Heterogeneous Beliefs

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  • Thiago de Oliveira Souza

Abstract

We study the presence of long term investors using different return forecasting strategies and switching them based on their past performance generates the price trends observed in financial markets. In the empirical section, we assume that investors choose how to allocate their portfoilios among four major stock indices: Dow Jones, FTSE, Nikkei and Hand Seng. The exercise shows that a decrease in the proportion of fundamentalists is related to movements in prices that are subsequentialy reverted. In this paper, we bridge the literatures on intertemporal asset allocation and on heterogeneous beliefs. The interaction between two switching types of agents, e.g. fundamentalists and chartists, is responsible for endogenously generating the observed price trends.

Suggested Citation

  • Thiago de Oliveira Souza, 2010. "Strategic Asset Allocation with Heterogeneous Beliefs," Working Papers ECARES ECARES 2010-042, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:eca:wpaper:2013/73599
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    References listed on IDEAS

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    1. Shanken, Jay, 1992. " The Current State of the Arbitrage Pricing Theory," Journal of Finance, American Finance Association, vol. 47(4), pages 1569-1574, September.
    2. Jose A. Scheinkman & Wei Xiong, 2003. "Overconfidence and Speculative Bubbles," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1183-1219, December.
    3. Alberto Giovannini & Philippe Weil, 1989. "Risk Aversion and Intertemporal Substitution in the Capital Asset Pricing Model," NBER Working Papers 2824, National Bureau of Economic Research, Inc.
    4. George Chacko & Luis M. Viceira, 2005. "Dynamic Consumption and Portfolio Choice with Stochastic Volatility in Incomplete Markets," Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1369-1402.
    5. Lei, Vivian & Noussair, Charles N & Plott, Charles R, 2001. "Nonspeculative Bubbles in Experimental Asset Markets: Lack of Common Knowledge of Rationality vs. Actual Irrationality," Econometrica, Econometric Society, vol. 69(4), pages 831-859, July.
    6. Shanken, Jay, 1982. " The Arbitrage Pricing Theory: Is It Testable?," Journal of Finance, American Finance Association, vol. 37(5), pages 1129-1140, December.
    7. Kandel, Eugene & Pearson, Neil D, 1995. "Differential Interpretation of Public Signals and Trade in Speculative Markets," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 831-872, August.
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    More about this item

    Keywords

    asset pricing; intertemporal asset allocation; heterogeneous beliefs; adaptative learning;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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