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Global Tactical Sector Allocation: A Quantitative Approach

Last Updated on 10 February, 2024 by Rejaul Karim

The concept of Global Tactical Sector Allocation (GTSA) has gained traction over the years as investors seek to optimize their portfolio performance. By examining seven variables over an extended period from 1970 to 2008, the research paper “Global Tactical Sector Allocation: A Quantitative Approach” by Ronald Q. Doeswijk and Pim van Vliet aims to provide deeper insights into factors that contribute to significant returns in global sector indices.

While the study acknowledges the effectiveness of certain variables such as momentum, earnings revisions, and the Sell in May seasonal, it also highlights the failure of monetary policy and valuation in predicting global sector performance.

Furthermore, the paper presents a GTSA strategy that combines momentum with seasonal factors and demonstrates its potential in achieving a compounded annual return of 9.9% after transaction costs. This comprehensive research sets the stage for further exploration into strategies focused on global sector allocation and enhancing overall returns.

Abstract Of Paper

This study examines seven variables for Global Tactical Sector Allocation (GTSA) purposes. We construct 10 global sector indices over the extended sample period from 1970 to 2008. This enables us to test previously documented variables on a global basis and to examine whether they continued to work after their publication dates. We document significant returns for momentum (1-month and 12-1 month), earnings revisions and Sell in May seasonal, also after their publication dates. By contrast, monetary policy and valuation (mean-reversion and dividend yield) fail to predict global sector returns. Our out-of-sample tests reveal an average decay in performance of about one third. A long-short GTSA strategy that combines momentum with seasonal has an annual success ratio of 82% and delivers a compounded annual return of 9.9% after transaction costs. To the best of our knowledge, a global sector allocation study with such a long sample period and with such a broad range of variables has not been conducted before.

Original paper – Download PDF

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Author

Ronald Q. Doeswijk
Independent

Pim van Vliet
Robeco Quantitative Investments

Conclusion

In summary, the research paper “Global Tactical Sector Allocation: A Quantitative Approach” by Ronald Q. Doeswijk and Pim van Vliet offers valuable insights into the factors underpinning GTSA performance by analyzing an extensive sample period and a diverse set of variables.

Notably, the research highlights the continued significance of momentum, earnings revisions, and the Sell in May seasonal strategy even after their respective publication dates, while also revealing the limitations of monetary policy and valuation in predicting global sector returns.

Moreover, the out-of-sample results showcase a GTSA strategy that combines momentum with seasonal elements, reaching an annual success rate of 82% and a compounded annual return of 9.9% after accounting for transaction costs. This pioneering study lays the groundwork for further investigation into global sector allocation strategies, paving the way for investors to make more informed and effective decisions in an increasingly interconnected global market.

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The Optimal Use of Return Predictability: An Empirical Analysis

The Price of Commodity Risk in Stock and Futures Markets

FAQ

Q1: What is Global Tactical Sector Allocation (GTSA), and what does the research study by Doeswijk and Van Vliet aim to achieve in this context?

GTSA involves strategically allocating investments across different global sectors to optimize portfolio performance. The research paper by Doeswijk and Van Vliet aims to provide deeper insights into the factors contributing to significant returns in global sector indices. It examines seven variables over an extended period and assesses their effectiveness in predicting global sector performance.

Q2: What are some key findings of the study regarding the variables tested for GTSA purposes?

The study finds that momentum (1-month and 12-1 month), earnings revisions, and the Sell in May seasonal strategy exhibit significant returns even after their respective publication dates. However, monetary policy and valuation variables, such as mean-reversion and dividend yield, fail to predict global sector returns effectively.

Q3: What is the significance of the GTSA strategy proposed in the study, and what are its key results?

The GTSA strategy combines momentum with seasonal factors and demonstrates an annual success ratio of 82%. After accounting for transaction costs, the strategy achieves a compounded annual return of 9.9%. This emphasizes the potential effectiveness of a GTSA approach in enhancing overall returns in the global sector allocation context.

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