Peer-Reviewed Journal Details
Mandatory Fields
Flavin T.;Wickens M.
2003
January
Review of Financial Economics
Macroeconomic influences on optimal asset allocation
Published
()
Optional Fields
Asset allocation Macroeconomic effects Multivariate GARCH
12
2
207
231
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. © 2002 Elsevier Science Inc. All rights reserved.
1058-3300
10.1016/S1058-3300(02)00072-1
Grant Details