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Macroeconomic Influences on Optimal Asset Allocation

Flavina, T.J. and Wickens, M.R. (2002) Macroeconomic Influences on Optimal Asset Allocation. Review of Financial Economics, 12 (2). pp. 207-231. ISSN 1058-3300

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Abstract

We develop a tactical asset allocation strategy that incorporates the effects of macroeconomic variables. The joint distribution of financial asset returns and the macroeconomic variables is modelled using a VAR with a multivariate GARCH (M-GARCH) error structure. As a result, the portfolio frontier is time varying and subject to contagion from the macroeconomic variable. Optimal asset allocation requires that this be taken into account. We illustrate how to do this using three risky UK assets and inflation as a macroeconomic factor. Taking account of inflation generates portfolio frontiers that lie closer to the origin and offers investors superior risk–return combinations.

Item Type: Article
Institution: The University of York
Academic Units: The University of York > Economics and Related Studies (York)
Depositing User: York RAE Import
Date Deposited: 17 Feb 2009 09:36
Last Modified: 17 Feb 2009 09:36
Published Version: http://dx.doi.org/10.1016/S1058-3300(02)00072-1
Status: Published
Publisher: Elsevier
Identification Number: 10.1016/S1058-3300(02)00072-1
URI: http://eprints.whiterose.ac.uk/id/eprint/7412

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