Asset allocation with forward-looking distribution Online publication date: Fri, 05-Apr-2024
by Takuya Kiriu; Norio Hibiki
International Journal of Portfolio Analysis and Management (IJPAM), Vol. 2, No. 4, 2024
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.
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