A Study On Asset Allocation Based On Business Cyceles

Asset allocation based on the economic cycle is a positive asset allocation strategy. The importance of asset allocation and the various positive asset allocation strategies and methods of research since the 1980s have been important research literatures. Since the 1990s, some scholars thought the different stages of the economic cycle should be tailored to different assets based on assets yield changes in the features of the different stages of the economic cycle. However, the main limitation of these studies focus on stocks, bonds and other traditional assets.the limitation also include the determination ofdifferent stages of ecnomoc cycles according to the delay turning point in the economic cycle, or according to the actual GDP and potential GDP output gap.Asset allocation literature based on the economic cycle exists in the following limitations: first, involving the distribution of assets including stocks and shares, and other traditional assets, the property of the residents of this increasingly large proportion of the wealth of financial assets not included; Second, the stock bonds, and other financial assets and economic cycles are limited to the relationship between the directional analysis and empirical stage, lacking a unified quantitative model as description of the relationship between stock, real estate, bonds and the economy cycle; third, because of the lag of economic cycle and uncertainty prior judgment of the various stages , asset allocation rules need to be improved. Therefore, in this paper, studies on the basis of previous studies made on the following aspects:(1) the real estate is involved into asset allocation areas, the relationship between the stock price fluctuations ,house prices fluctuations and the economic cycle are researched; Established real estate in most appropriate configuration stage, and the corresponding empirical study. Use cointegration test, Granger causality test, vector error correction model and the impulse response variance decomposition method for the period 1968-2006 Japanese stock prices and the empirical test results show that the relationship between stock prices and the long-term existence of cointegration relationship and stock prices are the reason for Granger. Use related test, Granger causality test and the system equations regression model on the fluctuations in stock prices and the economic cycle, which shows that the stock prices lead economic cycle fluctuations and house prices fluctuations are basically the same as economiccycles, stock price volatility fluctuations significantly ahead.(2) the establishment of a quantitative analysis model.the model include stock property and bonds in different stages of the economic cycle in a unified framework of analysis. Asset allocation based on busibess cycles model(AABCM)derived from the pricing formula for the valuation of assets on the basis on the cash flow discount. According to the economic cycle different stages of expected income and interest rate changes will be characterized by different economic cycles at different stages with a variety of financial assets linked to different yield. Economic recovery phase asset allocation should focus on equity, economic prosperity stage should focus on the real estate , the economic recession phase should hold monetary assets or selling short, depression stage should focus on bonds.(3) A asset allocation rule is proposed according to the econoomic indicators in the different stages of the economic cycle ,combining assessment of the value of assets.Asset allocation for the economic cycle, where the light of the different stages of the judgment, with the right level of assessment of the value of assets, integrated set priorities and allocation of assets from the market timing. The valuation of the stock by PE and PB, real estate by price to income ,bonds by the level of bonds yield and yield curve shape as a reference assessment indicators. The range of these indicators in long term determine the standard of value of assetd.(4) Consolidate results of previous studies about the relationship between returns of financial asset and economic cycles and provide a lot of evidence. Relationship between financial assets yield and the economic cycle embodied in influence of the macroeconomic situation on financial asset prices determinants. Factors deciding stock price are the expected profits of listed companies and expected level of market interest rates. The determining factors of property are real estate income and the anticipated level of market interest rates and changes in the trend. Expected income housing prices in the housing rental income and property value, the interest rate level changes reflected in the construction costs and expected benefits of the discount cost of the changes. The main determinants of bond prices is interest rates and changes in the trend. The bonds are fixed-income products, expected revenue unchanged, the prices of the major bond change with market interest rates . The different stages of the economic cycle, the rate of economic growth, interest rates and changes in the level and trend of inflation is different. Random discount factor and time-varying investment opportunities for the different stages of the economic cycle for active asset allocation provides a theoretical basis.(5) The asset allocation mechanism in economic recession phase is summarised. The asset allocation of economic recession phase is different from the other three stages. In times of economic recession, as shares real estate and financial assets such as bonds yields are negative, only holders of monetary assets or short sale of financial assets is suitable. In times of economic recession, financial assets decreased often leads to a financial crisis. The conduction mechanism is the first from the foreign exchange market as a fuse, conduction to the stock market, the stock market again by conduction to the real estate market, the real estate market to the banks to transfer the money market, by the currency market last transmission to the real economy. During the financial markets the spillover effects of cross contamination, coupled with the amplification of fire derivative markets, resulting in full-blown financial crisis related to the proliferation of regional financial crisis triggered a regional and even economic crisis.The the major innovations are:(1)The establishment of asset allocation model (Asset Allocation Model Based on Business Cycles), or AABCM. The model equation: dt,in the model, concepts "expected income effect" and "capital cost-effective" to explain the earnings level of financial assets in various stages of the economic cycle earnings level. The economic recovery phase, despite the stock, real estate and bond yields are positive, but because of the stock relative to the other two assets at greatest risk, therefore, equity ,the highest yield, is the most appropriate asset. Economic prosperity stage, the rise in interest rates, yields a negative, the income effect of the stock is not expected to touch on capital cost-effective, revenue for stocks is the negative; Real estate interest rates and rising inflation because of the income effect greater than expected capital cost-effective, the rate of return for real estate is in the economic prosperity during the best suited . The economic recession phase, stocks, bonds and real estate earnings are negative, the most appropriate asset is currency , or assets fell short. In times of economic depression, a decline in interest rates, bond prices rose, and the most appropriate asset is bond.(2) Real estate is included in financial assets areas, and relationship between stock prices and property prices are researched. Stock prices and house prices exists in relation of long-term and Cointegration, stock prices is the Granger reason, fluctuations in stock prices before property prices can be explained for the wealth effect. House prices and GDP growth rates, interest rates and prices were significantly positive correlation. house prices with interest rates and inflation, is the internal reason of expected income effect greater than capital cost-effective in a period of economic prosperity, fluctuations in housing prices and the economic cycle fluctuations is basically the same, stock price volatility fluctuations significantly ahead.(3) a positive asset allocation rules is proposed. Based on the economic cycle asset allocation model identified first the stage of the economic cycle, then the assets assessment. if the assessment results agree with the identification phase of the cycle , the asset allocation decision can be made.