Tactical Asset Allocation, Parameter Uncertainty, and Intertemporal Hedging : An Exploratory Study for the Swiss Stock Market

This paper examines how the evidence of stock market predictability affectsoptimal portfolio choice for buy-and-hold and dynamic investors withdifferent planning horizons. As in Barberis (2000), particular attention ispaid to estimation risk, i.e., uncertainty about the true values of the predictiveregression parameters. The empirical analysis for the Swiss stockmarket shows that there is enough predictability in returns to make shorttermbuy-and-hold investors time the market. However, optimal weightsfor long-term buy-and-hold investors are generally not very sensitive tothe initial value of the predictive variable, particularly when parameteruncertainty is taken into account. In general, there is no horizon effectand the intertemporal hedging demand is empirically negligible, too. Ingeneral, dynamic investors who follow a dynamic rebalancing strategydo not hold more stocks and do not time the market more aggressivelythan myopic buy-and-hold investors. The Swiss stock market does notprovide an intertemporal hedge to changes in investment opportunities.Consequently, common definitions for tactical asset allocation strategiesas myopic short-term strategies seem to be empirically justified.