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Dynamic asset allocation, equity return predictability and market anomalies

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thesis
posted on 28.03.2022, 18:18 authored by Yiwen (Paul) Dou
This thesis contains three essays that examine several modern developments in the area of portfolio management, in both global and the Australian market. The thesis considers three important topics in portfolio management, including equity premium forecasts, dynamic asset allocation and stock market anomalies, which are directly related to improved investment outcomes. The first essay examines the equity premium predictability and its implication to asset allocation. It provides one of the first comprehensive studies on out-of-sample stock returns predictability in Australia. While most of the empirically well-known predictive variables fail to generate out-of-sample predictability, the essay documents a significant out-of-sample prediction in forecasting ahead one-year and, to a lesser extent, one-quarter future excess returns, using a combination forecast of variables. The essay also finds improved asset allocation using the combination forecast of these predictors. The second essay investigates one specific application of the dynamic asset allocation. Particularly, the study models the nonlinearity of time-series returns using a regime-switching process, and hence examines the asset allocation implication of this dynamic model. The asset allocation is applied across both regions and sectors. The regime-dependent asset allocation potentially adds value to the traditional static mean variance allocation. In addition, optimal allocation across sectors provide greater benefits compared to international diversification, which is characterised by higher returns, lower risks, lower correlations with the world market and a higher Sharpe ratio. While the first two essays consider the implication of time-series asset pricing on portfolio management, the third essay examines asset pricing in cross-section. In particular, it investigates the pervasiveness of eight well-documented anomalies in global equity markets for the Australian stock market. After partitioning stocks into three size categories (micro, small and big), the study finds that none of the eight anomalies are pervasive across size groups in either sorts or cross-sectional regressions. The existence of most anomalies is attributable primarily to microcap stocks. By looking at the hedge portfolio returns of anomalies in different regimes, the essay also shows that many anomalies tend to exist in bear markets rather than bull markets. This evidence contradicts the risk-based explanations for the existence of anomalies. The study provides important evidence to portfolio managers seeking to exploit anomalies in different segments of the stock market in Australia.

History

Table of Contents

1. Introduction -- 2. Out of sample stock return predictability in Australia -- 3. Cross-region and cross-sector asset allocation with regimes -- 4. Dissecting anomalies in the Australian stock market -- 5. Conclusion -- Appendix.

Notes

Includes bibliographical references "November 2013 A thesis submitted in fulfilment for the degree of Doctor of Philosophy"

Awarding Institution

Macquarie University

Degree Type

Thesis PhD

Degree

PhD, Macquarie University, Graduate School of Management

Department, Centre or School

Macquarie Graduate School of Management

Year of Award

2013

Principal Supervisor

David Gallagher

Rights

Copyright Yiwen Dou 2013 Copyright disclaimer: http://mq.edu.au/library/copyright

Language

English

Extent

1 online resource (x, 135 leaves)

Former Identifiers

mq:71869 http://hdl.handle.net/1959.14/1278928