Botshekan, M. and Lucas, A. (2017). Long-term versus short-term contingencies in asset allocation Journal of Financial and Quantitative Analysis, 52(5):2277--2303.
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Affiliated author
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Publication year2017
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JournalJournal of Financial and Quantitative Analysis
We investigate whether long-term and short-term components of typical conditioning variables in asset pricing studies, such as the dividend yield or yield spread, have different implications for optimal asset allocation. We argue that short-term components relate mostly to momentum, and long-term components relate mostly to mean-reversion effects, respectively. Therefore, they may have a different information content for investors with different horizons. We obtain improvements in terms of out-of-sample Sharpe ratios and expected utilities for decomposed state variables that directly reflect information related to the stock market, such as the dividend yield and stock market trend.