Working Paper: CEPR ID: DP3464
Authors: Allan G. Timmermann; David Blake
Abstract: This paper analyses the international equity holdings of a large panel of UK pension funds. We find considerable evidence of market timing activity, as illustrated by the funds' decision to scale back their investments in the US stock market during the 1990s. To explain this we model portfolio weight dynamics as a function of time-varying conditional moments. We find that a substantial part of the evolution in portfolio weights is explained by time-varying conditional expected returns, volatilities and covariances with domestic equity returns. Consequently, controlling for the effect of state variables that track time-variations in investment opportunities significantly affects estimates of returns from international market timing. Our estimates suggest that the portfolio movements that were orthogonal to such state variables accounted for a net loss of 0.2 per cent per annum for the average fund.
Keywords: international asset allocation; investment performance; market timing; UK pension funds
JEL Codes: G10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| time-varying conditional moments (C32) | portfolio weights of UK pension funds (G23) |
| market conditions (P42) | portfolio decisions of UK pension funds (G23) |
| portfolio weight dynamics (G11) | changes in portfolio weights (G11) |
| state variables (C29) | estimates of returns from international market timing (G15) |
| portfolio movements orthogonal to state variables (G11) | average net loss for funds (G23) |