New evidence on monetary policy expectations and optimal asset allocation

Michael Calamari, Fordham University


Brocato and Steed (1998) showed that portfolio rebalancing (i.e., shifting allocation weights) based on NBER (National Bureau of Economic Research) business cycle turning points substantially improves in-sample Markowitz efficiency versus a buy-and-hold strategy. Jensen and Mercer (2003) improve upon Brocato and Steed and investigated potential improvements from portfolio rebalancing based on turning points in the monetary cycle. To identify a monetary cycle turning point, Jensen and Mercer used the discount rate and were able to rely, therefore, on ex ante information which allows for out-of-sample testing. In out-of-sample tests, Jensen and Mercer continue to find economically meaningful performance, after transaction costs, using the monetary cycle to time portfolio rebalancing that exceeds Brocato and Steed's business-cycle allocation approach. The contribution of their research is that they offer a practical approach for earning excess returns through tactical asset allocation. Separately, recent innovations provide empirical support for a policy anticipation hypothesis whereby 30-day federal funds futures are used as a proxy for policy expectations. Given the evidence that monetary cycle turning points can be used to time asset allocation decisions to earn superior portfolio returns and that the Federal funds futures market has been shown to be an accurate predictor of monetary cycle turning points, this paper investigates whether an investor can earn greater portfolio returns after transaction costs by predicting monetary cycle turning points to time portfolio rebalancing using Federal funds futures market rather than the discount rate.

Subject Area


Recommended Citation

Calamari, Michael, "New evidence on monetary policy expectations and optimal asset allocation" (2007). ETD Collection for Fordham University. AAI3271265.