Non-parametric forecasting for conditional asset allocation

$43.00 plus tax (Refund Policy)

Buy Article:

Abstract:

Conditional asset allocation (CAA) involves using key past economic and financial data to produce forecasts of expected returns for the various asset classes involved in the asset allocation decision. Traditional forecasting models for asset returns, in particular linear regression models and ARIMA time series based models, often provide economically meaningful asset allocation decisions. These results, however, only seem to possess power in-sample, and the out-of-sample performance of such methodologies suggests, consistent with efficient market theory, that there is no economic benefit from undertaking conditional asset allocation.Alternative forecasting models have only rarely been explored in the literature. Here, the economic forecasting power of kernel regression, a fairly common non-parametric statistical model, is investigated. As for the more traditional methodologies, it is found that the model has good economic significance in-sample. Unlike in the more traditional methods, this economic significance also persists in out-of-sample periods. Moreover, simple trading rules based on filtered signals from the model provide enhanced economic performance. The reasons why this alternative methodology provides better out-of-sample results are conjectured, and it is tied to the behaviour of the underlying asset prices.Journal of Asset Management (2002) 3, 213–228; doi:10.1057/palgrave.jam.2240076

Document Type: Research Article

DOI: http://dx.doi.org/10.1057/palgrave.jam.2240076

Affiliations: 1: 1WestLB Asset Management, 25 Basinghall Street, London, EC2V 5HA, UK, bevan.blair@westam.com, Tel: +44 20 7020 7412, Fax: +44 020 7020 7350, Email: stan.beckers@westam.com 2: 2Quantitative Analyst at WestAM

Publication date: December 1, 2002

Related content

Share Content

Access Key

Free Content
Free content
New Content
New content
Open Access Content
Open access content
Subscribed Content
Subscribed content
Free Trial Content
Free trial content
Cookie Policy
X
Cookie Policy
ingentaconnect website makes use of cookies so as to keep track of data that you have filled in. I am Happy with this Find out more