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Long-Term versus Short-Term Contingencies in Asset Allocation

Published online by Cambridge University Press:  31 October 2017

Mahmoud Botshekan  and
André Lucas
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Abstract

We investigate whether long-term and short-term components of typical conditioning variables in asset pricing studies, such as the dividend yield or yield spread, have different implications for optimal asset allocation. We argue that short-term components relate mostly to momentum, and long-term components relate mostly to mean-reversion effects, respectively. Therefore, they may have a different information content for investors with different horizons. We obtain improvements in terms of out-of-sample Sharpe ratios and expected utilities for decomposed state variables that directly reflect information related to the stock market, such as the dividend yield and stock market trend.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 5 , October 2017 , pp. 2277 - 2303
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

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Footnotes

1

We thank an anonymous referee, Stephen Brown (the editor), Frank de Jong, Ralph Koijen, Philip Stork, and Pieter Jelle van der Sluis for detailed and helpful comments on earlier versions of this article, as well as participants at the 2012 European Finance Association meeting and seminar participants at the Duisenberg School of Finance. Lucas thanks the Dutch Science Foundation (NWO) under Grant VICI-453-09-005 for financial support. Botshekan acknowledges the support of Science Foundation Ireland under Grant 08/SRC/FMC1389 and the support from the Iran Ministry of Science, Research, and Technology. For programming, we used the programming package OxMetrics; see Doornik (2009) and Doornik and Ooms (2007) for further information.

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