ASSET ALLOCATION IN GLOBAL PORTFOLIO OVER BUSINESS CYCLES
Dynamic management of investment portfolio is a key focus of each investor. Asset reallocation taking into consideration business cycles allows increasing portfolio efficiency. Previous research on asset allocation over business cycles was focused on numerous issues. It included different asset classes in portfolios and investigated various dynamic asset allocation strategies; applied different indicators for identification of turning points. This study is designed to identify asset allocation in global portfolio over business cycle using Sharpe ratio as a function of maximisation.
Four phases of business cycle were identified using OECD Composite Leading Indicator: a peak, a contraction, a trough and an expansion. The global portfolio includes five asset classes (stocks, bonds, real estate, gold and commodities), and six indices representing them: S&P 500, MSCI EAFE, Barclays Capital Aggregate Bond, FTSE Nareit, Gold Spot and S&P GSCI Total Return. t-test, F-test, and fisher-z transformation test were applied to check the robustness of returns, standard deviations and correlations. The portfolio is optimised using variance-covariance matrix and Solver function. The research period is 1978-2018.
The results of the study revealed that in the peak and expansion phases most of the portfolio should be allocated to stocks and gold. Gold is a safe investment as it reduces the total risk of the portfolio. Meanwhile, stocks and bonds should dominate in the portfolio during the contraction phase, while bonds and gold – during the trough phase. Extremely sharp asset reallocation is observed in the portfolio during the phases of contraction and trough: the portfolio includes only 2-3 asset classes instead of 5-6 during the expansion and peak. Both real estate and commodities have the most significant weight in the portfolio during the expansion phase. Meanwhile, real estate and commodities are not desirable investment in contraction and trough phases.
Keywords: global portfolio, asset allocation, business cycle.
JEL codes: G11, G15.
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