Chondrogiannis, Ilias; Vivian, Andrew; Wohar, Mark E; (2022) Can Return Forecasts enhance International Asset Allocation? Evidence from the Sum-of-Parts Approach. UCL School of Slavonic and East European Studies (SSEES): London, UK.

Preview

Text Chondrogiannis_CVW 28-6.pdf Download (2MB) | Preview

Abstract

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.

Download activity - last month

Export as JSONXMLCSV

Download activity - last 12 months

Export as XMLJSONCSV

Downloads by country - last 12 months

Export as CSVXMLJSON

Archive Staff Only

View Item