Flavin, Thomas and Wickens, M.R. (2003) Macroeconomic influences on optimal asset allocation. Review of Financial Economics, 12. 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
Keywords:	Asset allocation; Macroeconomic effects; Multivariate GARCH;
Academic Unit:	Faculty of Social Sciences > Economics, Finance and Accounting
Item ID:	8016
Identification Number:	https://doi.org/10.1016/S1058-3300(02)00072-1
Depositing User:	Thomas Flavin
Date Deposited:	08 Mar 2017 17:25
Journal or Publication Title:	Review of Financial Economics
Publisher:	Elsevier
Refereed:	Yes
URI:	Publisher
Use Licence:	This item is available under a Creative Commons Attribution Non Commercial Share Alike Licence (CC BY-NC-SA). Details of this licence are available here

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