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Can Return Forecasts enhance International Asset Allocation? Evidence from the Sum-of-Parts Approach

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. Green open access

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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.

Type: Working / discussion paper
Title: Can Return Forecasts enhance International Asset Allocation? Evidence from the Sum-of-Parts Approach
Open access status: An open access version is available from UCL Discovery
DOI: 10.14324/000.wp.10152947
Publisher version: https://www.ucl.ac.uk/ssees/
Language: English
Keywords: Return forecasting, Sum of Parts, Global asset allocation, EMD, International portfolio optimisation
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL SLASH > SSEES
UCL > Provost and Vice Provost Offices > UCL SLASH
URI: https://discovery.ucl.ac.uk/id/eprint/10152947
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