Much of previous research in finance has concentrated on explaining movements of individual securities rather than on explaining movements in the stock market as a whole. Although the available data are more limited than those for individual stocks, the movements in the stock market as a whole are extremely important for movements in individual stocks. Indeed, market events of the past ten years have sparked an interest in tactical asset allocation. The turbulence of October 1987 has only accelerated this interest. This study seeks to develop a methodology that systematically incorporates currently available information into the tactical asset allocation process. The goal of this study is not to predict individual stock prices, or every small movement in the market. Rather we would like to use the currently available data to provide the investor with an estimate of the probabilities associated with the broad measure of either a "bullish" or "bearish" market period. Logit analysis is used to determine which of the various timely and readily available data significantly affect the probabilities of "bullish" and "bearish" market months. We use the estimated probabilities generated by the logit analysis to suggest the optimal allocation of funds between the risk-free asset and the market portfolio and compare several timing strategies with a buy-and-hold strategy. An Asset allocation strategy based on the probabilities assigned by the logit model outperformed a buy-and-hold strategy by achieving a greater terminal wealth with less variability of returns. We also find that one who used our model would have reduced downside risk and improved average performance over past cycles.
| Identifer | oai:union.ndltd.org:UMASS/oai:scholarworks.umass.edu:dissertations-7960 |
| Date | 01 January 1990 |
| Creators | Nam, Joong-Soo |
| Publisher | ScholarWorks@UMass Amherst |
| Source Sets | University of Massachusetts, Amherst |
| Language | English |
| Detected Language | English |
| Type | text |
| Source | Doctoral Dissertations Available from Proquest |
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