Time-Variability in Higher Moments Is Important for Asset Allocation

Details

Serval ID
serval:BIB_0F74294BD91E
Type
Report: a report published by a school or other institution, usually numbered within a series.
Publication sub-type
Working paper: Working papers contain results presented by the author. Working papers aim to stimulate discussions between scientists with interested parties, they can also be the basis to publish articles in specialized journals
Collection
Publications
Institution
Title
Time-Variability in Higher Moments Is Important for Asset Allocation
Author(s)
Jondeau E., Rockinger M.
Institution details
Swiss Finance Institute
Issued date
11/2006
Number
06-35
Genre
Research Paper
Language
english
Notes
New version: October 2008
Abstract
It is well known that strategies that allow investors to allocate their wealth using return and volatility forecasts, the use of which are termed market and volatility timing, are of significant value. In this paper, we show that distribution timing, defined here as the ability to use forecasts for moments up to the fourth one, yields significant incremental economic value. By considering the weekly asset allocation among the five largest international stock markets, we find that distribution timing yields a gain of around 140 basis points per year over the last decade. To control for the parameter uncertainty of the model, we cast the model into a Bayesian setting. We also consider alternative preference structures and model specifications. In all cases, the value of distribution timing remains economically significant.

Keywords
Bayesian estimation, distribution timing, GARCH model, nonnormality, parameter uncertainty, Portfolio allocation, volatility timing
Create date
03/05/2010 12:31
Last modification date
20/08/2019 12:36
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