%K Return forecasting, Sum of Parts, Global asset allocation, EMD, International portfolio optimisation
%L discovery10152947
%I UCL School of Slavonic and East European Studies (SSEES)
%C London, UK
%X We examine whether real-time return forecasts are valuable to an investor
looking to allocate their portfolio across a wide selection of countries. We
expand the Sum-of-Parts (SoP) method for forecasting stock returns to an
international setup by adding foreign exchange returns as an additional component. We use two different methods to calculate the forecasts. The first
method (Empirical Mode Decomposition) uses wavelets to frequency decompose each part into locally independent sub-signals, while the second method
combines historical averages and predictive regressions. We then compare
the performance of various types of portfolia under the SoP and historical
average forecasts, with rebalancing taking place every period. We find that
SoP forecasts deliver economic gains to an international investor over the
historical average, especially when the EMD method is implemented. We
further demonstrate that substantial economic gains can be generated for
an international investor based in different home countries. Our results are driven by an increase in the forecast performance of each part, most notably
the foreign exchange growth rate.
%T Can Return Forecasts enhance International Asset Allocation? Evidence from the Sum-of-Parts Approach
%A Ilias Chondrogiannis
%A Andrew Vivian
%A Mark E Wohar
%D 2022