Title: Asset allocation with forward-looking distribution

Authors: Takuya Kiriu; Norio Hibiki

Addresses: Graduate School of Science and Technology, Keio University, 3-14-1 Hiyoshi, Kohoku-ku, Yokohama, Japan; Mitsubishi UFJ Trust Investment Technology Institute Co., Ltd., 4-5, Marunouchi 1-Chome, Chiyoda-ku, Tokyo, Japan ' Department of Industrial and Systems Engineering, Keio University, 3-14-1 Hiyoshi, Kohoku-ku, Yokohama, Japan

Abstract: In asset allocation, selecting an approach to estimate return distribution has a significant impact on investment performance. Previous studies show the effectiveness of the forward-looking approach for timing the stock market. In practice, it is common to consider asset allocations that include bonds and stocks. However, a forward-looking approach for bonds has not been developed or investigated. In this study, we develop a forward-looking method to estimate bond return distribution from current market prices. Then, we construct a forward-looking asset allocation model for a Japanese investor under a practical setting that includes both bonds and stocks. From the out-of-sample performance comparison with non-forward-looking approaches, we obtain the following results. First, the forward-looking approach performs better than the non-forward-looking approaches. Second, the timing ability contributes to the better performance of the forward-looking approach. Third, the forward-looking approach is beneficial for bonds and stocks.

Keywords: finance; portfolio management; asset allocation; return distribution; implied distribution; forward-looking; risk-adjustment; recovery theorem; bonds; stocks.

DOI: 10.1504/IJPAM.2024.137760

International Journal of Portfolio Analysis and Management, 2024 Vol.2 No.4, pp.316 - 341

Received: 13 May 2021
Accepted: 22 Oct 2021
Published online: 05 Apr 2024 *

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