DISCUSSION PAPER SERIES
No. 3464
INTERNATIONAL ASSET ALLOCATION WITH TIME-VARYING INVESTMENT OPPORTUNITIES Allan G Timmermann and David Blake
FINANCIAL ECONOMICS
ZZZFHSURUJ Available online at: www.cepr.org/pubs/dps/DP3464.asp and http://ssrn.com/abstract_id=328300
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ISSN 0265-8003
INTERNATIONAL ASSET ALLOCATION WITH TIME-VARYING INVESTMENT OPPORTUNITIES Allan G Timmermann, University of California, San Diego and CEPR David Blake, Birkbeck College, London Discussion Paper No. 3464 July 2002 Centre for Economic Policy Research 90–98 Goswell Rd, London EC1V 7RR, UK Tel: (44 20) 7878 2900, Fax: (44 20) 7878 2999 Email:
[email protected], Website: www.cepr.org This Discussion Paper is issued under the auspices of the Centre’s research programme in FINANCIAL ECONOMICS. Any opinions expressed here are those of the author(s) and not those of the Centre for Economic Policy Research. Research disseminated by CEPR may include views on policy, but the Centre itself takes no institutional policy positions. The Centre for Economic Policy Research was established in 1983 as a private educational charity, to promote independent analysis and public discussion of open economies and the relations among them. It is pluralist and non-partisan, bringing economic research to bear on the analysis of medium- and long-run policy questions. Institutional (core) finance for the Centre has been provided through major grants from the Economic and Social Research Council, under which an ESRC Resource Centre operates within CEPR; the Esmée Fairbairn Charitable Trust; and the Bank of England. These organizations do not give prior review to the Centre’s publications, nor do they necessarily endorse the views expressed therein. These Discussion Papers often represent preliminary or incomplete work, circulated to encourage discussion and comment. Citation and use of such a paper should take account of its provisional character. Copyright: Allan G Timmermann and David Blake
CEPR Discussion Paper No. 3464 July 2002
ABSTRACT International Asset Allocation with Time-Varying Investment Opportunities* This Paper analyses the international equity holdings of a large panel of UK pension funds. We find considerable evidence of market timing activity, as illustrated by the funds’ decision to scale back their investments in the US stock market during the 1990s. To explain this we model portfolio weight dynamics as a function of time-varying conditional moments. We find that a substantial part of the evolution in portfolio weights is explained by timevarying conditional expected returns, volatilities and covariances with domestic equity returns. Consequently, controlling for the effect of state variables that track time-variations in investment opportunities significantly affects estimates of returns from international market timing. Our estimates suggest that the portfolio movements that were orthogonal to such state variables accounted for a net loss of 0.2% per annum for the average fund. JEL Classification: G10 Keywords: international asset allocation, investment performance, market timing and UK pension funds Allan G Timmermann UCSD Department of Economics 9500 Gilman Drive La Jolla CA 92093-0508 USA Tel: (1 858) 534 4860 Fax: (1 858) 534 7040 Email:
[email protected]
David Blake Pensions Institute Birkbeck College Gresse Street LONDON W1P 2LL Tel: (44 20) 7631 6410 Fax: (44 20) 7631 6416 Email:
[email protected]
For further Discussion Papers by this author see:
For further Discussion Papers by this author see:
www.cepr.org/pubs/new-dps/dplist.asp?authorid=116464
www.cepr.org/pubs/new-dps/dplist.asp?authorid=106126
*BSI Gamma Foundation are gratefully acknowledged for financial support. The comments of an anonymous referee were very helpful in revising the Paper. We would also like to thank Val Ashmore, Alistair MacDougall and Alan Puride of The WM Company and Hedi Dorai of Morgan Stanley Capital International for their help in providing us with the data set used in this study. Mike Brennan provided many suggestions that greatly improved the Paper. We also thank Alastair Ross Goobey, CEO of Hermes Pension Fund Managers, Graham Elliott, Michael Melvin and seminar participants at University of Cambridge, City University Business School, Imperial College Management School, London School of Economics, and the 1999 London conference on Forecasting in Financial Markets for helpful suggestions.
Submitted 03 July 2002
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