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A multivariate dichotomic approach for tactical asset allocation

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Abstract:

This paper revisits the problem of tactical asset allocation which consists in predicting which of bonds or stocks will perform better over the next period. A multivariate dichotomic framework is presented to address this problem. The model correctly predicts 62.5 per cent of the out-of-sample months and leads to a better economic performance than the results obtained by more classical methods such as linear and logistic regression or discriminant analysis. Moreover, an investment strategy based on the prediction from the model dominates more naive strategies that every month invest 60 per cent in stocks and 40 per cent bonds or 100 per cent in stocks.Journal of Asset Management (2005) 6, 206–218; doi:10.1057/palgrave.jam.2240176

Document Type: Research Article

DOI: https://doi.org/10.1057/palgrave.jam.2240176

Affiliations: 1Caisse de dépôt et palcement du Québec, Investment Policy Research, 1000 Place Jean-Paul-Riopelle, 9th floor, Montreal, Quebec, Canada H2Z 2B3, Tel: +1 (514) 847 2601, Fax: +1 (514) 847 5443, Email: mroberge@cdpcapital.com

Publication date: 2005-10-01

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