Empirical Study of Asset Returns by Economic Cycles and ... › panama2017 › docs ›...

1ASTIN/AFIN Colloquium Panama 2017

Advisor, Tokai Tokyo Financial Holdings Inc.

Miwaka Yamashita, PhD

Empirical Study of Asset Returns by Economic

Cycles and Investment Strategy

* This is describing an individual opinion and is not expressing a belonging company’s opinion.

AGENDA

• INTRODUCTION

• Regime Definition

• Regimes and Returns

• Equilibrium Returns

• Regime Returns

• Efficient Frontiers

• Efficient Portfolios

2PBSS/IACA Collouium Cancun 2017 2ASTIN/AFIN Colloquium Panama 2017

INTRODUCTION

We have two kinds of researches and they are theoretical and empirical. Aboutthe former, recent development of consumption based asset pricing approach andBellman principle use for recursive utility function modeled relationship betweeneconomic cycle and asset price. They are, for instance, Christiano (1995), Backuset al. (2007), Lochstoer et al. (2009), Chabot (2009), Backus et al. (2010), Akbariand Carrieri (2015), Bianchi et al. (2016) and others.

We research the later and it is investment asset instrument’s behavior for eachregime and suggest investment strategy. The discussion is more assetmanagement and investment tastes and the points are more practical for banks,insurers, pensions and investment managers. So far, for instance, World Bank(1998) described asset prices and the business cycle relationship and Miranda-Agrippino and Rey (2015) analyzed global factors or monetary policy effects forbanks and asset managers. Of course, many of financial industry researchersreported regression based results. This paper is similar to Brocato and Steed(1998) and there are new points of direct regime analysis for asset returns and amore detailed portfolio switching investment strategy.


Regime Definition 1

• Based on Macro Data


Recent Official Economic Cycle

Japan US EU山谷

… 1993.10

1997.5 1999.1

2000.11 2002.1

2008.2 2009.3

2012.4

山谷

… 1991.3

2001.3 2001.11

2007.12 2009.6

山谷

… 1993.12

2008.3 2009.6

2011.9 2013.3

Source: Japan Cabinet Office, NBER, CEPR

Peak Trough Peak Trough Peak Trough

Inflation, Interest Rate

Economic

Growth

Recovery

Overheat

(Expansion)

Resession

Stagnation

(Crisis)

General Concept of Economic Cycle

Regime Definition 2

• Based on Market Data


Overheat

Recovery

Stagnation

Recession

Equity Return

Bond Return

Source: Bloomberg, ANAM, Author

Regimes and Returns

• How Regimes explain Returns?


Asset Returns by Each RegimeAverage Return p.a.

Stock Dividend Stock REIT Bond Inflation Linked Bond Investment Grade BondHigh Yield Bond MBS Gold

Japan Recovery -5.3% 4.2% 0.3% 2.5% 3.9% na na na -

Overheat -5.5% 4.7% 7.7% 1.7% 5.3% na na na -

Stagnation 0.1% 0.4% -6.0% 2.2% 2.7% na na na -

Resession -27.6% -17.3% -20.1% 4.4% -7.1% na na na -

US Recovery 13.7% 15.1% 15.2% 2.7% 3.8% 7.0% 11.1% 3.5% 4.4%

Overheat 9.0% 12.7% 12.4% 1.0% 0.9% 1.9% 4.6% 0.9% 9.6%

Stagnation -10.3% -17.3% -21.4% 4.9% 7.4% -1.9% -6.7% 2.7% 27.9%

Resession -37.4% -35.1% -50.6% 5.0% -5.5% -7.0% -20.4% 4.7% -1.2%

EU Recovery 18.1% 11.5% 19.7% 4.5% 6.4% 8.6% 20.0% 6.4% -

Overheat 6.3% 2.3% 15.8% 1.6% 0.7% 1.5% 5.3% 0.2% -

Stagnation -15.6% -22.3% -10.5% 4.4% 0.1% 0.2% -5.0% 1.6% -

Resession -10.6% -22.9% -15.6% 5.5% 5.8% 4.6% -3.2% 5.4% -

Asset Returns by Each RegimeAverage Return p.a.

Stock Dividend Stock REIT Bond Inflation Linked Bond Investment Grade BondHigh Yield Bond MBS Gold

Japan Recovery -5.3% 4.2% 0.3% 2.5% 3.9% na na na -

Overheat -5.5% 4.7% 7.7% 1.7% 5.3% na na na -

Stagnation 0.1% 0.4% -6.0% 2.2% 2.7% na na na -

Resession -27.6% -17.3% -20.1% 4.4% -7.1% na na na -

US Recovery 13.7% 15.1% 15.2% 2.7% 3.8% 7.0% 11.1% 3.5% 4.4%

Overheat 9.0% 12.7% 12.4% 1.0% 0.9% 1.9% 4.6% 0.9% 9.6%

Stagnation -10.3% -17.3% -21.4% 4.9% 7.4% -1.9% -6.7% 2.7% 27.9%

Resession -37.4% -35.1% -50.6% 5.0% -5.5% -7.0% -20.4% 4.7% -1.2%

EU Recovery 18.1% 11.5% 19.7% 4.5% 6.4% 8.6% 20.0% 6.4% -

Overheat 6.3% 2.3% 15.8% 1.6% 0.7% 1.5% 5.3% 0.2% -

Stagnation -15.6% -22.3% -10.5% 4.4% 0.1% 0.2% -5.0% 1.6% -

Resession -10.6% -22.9% -15.6% 5.5% 5.8% 4.6% -3.2% 5.4% -Source: Bloomberg, ANAM, Author

Equilibrium Returns

• Equilibrium and Reality


0%

5%

10%

15%

20%

25%

30%

Jap

an

Sto

ck

US

Sto

ck

EU

Sto

ck

Asi

a S

tock

EM

Sto

ck

Jap

an

Go

v

US

Go

v

Ge

rma

n G

ov

Fra

nce

Go

v

Ita

lia

Go

v

Sp

ain

Go

v

UK

Go

v

Ca

na

da

Go

v

AU

D G

ov

EM

Bo

nd

US

IG

EU

IG

US

HY

EU

HY

US

MB

S

EU

…

Jap

an

IL

US

IL

EU

IL

UK

IL

J R

EIT

G R

EIT

Go

ld

Equilibrium Return Historical Vol. Market Cap Weight

0%

2%

4%

6%

8%

10%

12%

Jap

an

Sto

ck

US

Sto

ck

EU

Sto

ck

Asi

a S

tock

EM

Sto

ck

Jap

an

Go

v

US

Go

v

Ge

rma

n G

ov

Fra

nce

Go

v

Ita

lia G

ov

Sp

ain

Go

v

UK

Go

v

Ca

na

da

Go

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AU

D G

ov

EM

Bo

nd

US

IG

EU

IG

US

HY

EU

HY

US

MB

S

EU

…

Jap

an

IL

US

IL

EU

IL

UK

IL

J R

EIT

G R

EIT

Go

ld

Equilibrium Returns Past 10y Excess Returns p.a.


Regime Returns

• Black-Litterman Model


Overheat

Recovery

Stagnation

Recession

Increase

Expected Equity

Return by ＋1σ

Decrease

Expected Equity

Return by-1σ

Decrease

Expected Bond

Return by -1σ

Increase

Expected Bond

Return by＋1σ

Stress Details


Efficient Frontiers (EF)

• EF for each Regime


Source: ANAMData from 2006 Apr to 2016 Nov.

-10%

-5%

0%

5%

10%

15%

20%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

Ex

pe

cte

d R

etu

rn

Expected Risk

-10%

-5%

0%

5%

10%

15%

20%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

Ex

pe

cte

d R

etu

rn

Expected Risk

-10%

-5%

0%

5%

10%

15%

20%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

Ex

pe

cte

d R

etu

rn

Expected Risk

-10%

-5%

0%

5%

10%

15%

20%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

Ex

pe

cte

d R

etu

rn

Expected Risk

Recovery Overheat

Stagnation

Recession

Efficient Frontiers for Cycle Regimes

Efficient Portfolios

• Portfolios for each Regime


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Stagnation Resession Recovery Overheating

Gold G REIT J REIT UK IL

EU IL US IL Japan IL EU Covered Bond

US MBS EU HY US HY EU IG

US IG EM Bond AUD Gov Canada Gov

UK Gov (Guilts) Spain Gov Italy Gov France Gov

German Gov (Bunds) US Gov (Treasury) Japan Gov (JGB) MSCI EM

MSCI APEC EU Stoxx US SP500 Japan Topix

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Stagnation Resession Recovery Overheating

Gold G REIT J REIT UK IL

EU IL US IL Japan IL EU Covered Bond

US MBS EU HY US HY EU IG

US IG EM Bond AUD Gov Canada Gov

UK Gov (Guilts) Spain Gov Italy Gov France Gov

German Gov (Bunds) US Gov (Treasury) Japan Gov (JGB) MSCI EM

MSCI APEC EU Stoxx US SP500 Japan Topix


Performances

• Portfolio Performance for each Regime Portfolio


80

90

100

110

120

130

140

150

Jan

-06

Jul-

06

Jan

-07

Jul-

07

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Jul-

16

Stagnation

Resession

Recovery

Overheating

80

90

100

110

120

130

140

150

160

Jan

-06

Jul-

06

Jan

-07

Jul-

07

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Jul-

16

Stagnation

Resession

Recovery

Overheating

Full Period Ret

Full Period Risk

Sharpe Ratio

3.64% 2.63% 2.70% 3.01% 3.18% 2.62% 3.32% 3.32%

11.69% 2.79% 2.01% 2.77% 4.04% 2.85% 3.90% 3.99%

0.31 0.94 1.34 1.08 0.79 0.92 0.85 0.83

Full GAA Exp Ret = 1.80% Full GAA Exp Risk = 4.00%

Stagnation Resession Recovery Overheating Stagnation Resession Recovery Overheating


Switching Strategy

• Switching Simulation


70

80

90

100

110

120

130

140

150

160

Jan

-06

Jul-

06

Jan

-07

Jul-

07

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Jul-

16

1.8% Return

4.0% Risk

Weight Portfolio

Full Period Ret

Full Period Risk

Sharpe Ratio

Strategy Full GAAStrategy Full GAA

1.8% Return 4.0% Risk

0.56% 3.69%

7.37% 3.81%

0.08 0.97


Summary

1. We define original cycle regime from the point of asset management. We set the optimal portfolio for each cycle regime and tested the performance of the strategy of switching those optimal portfolio. We decide each cycle regime’s typical expected returns for assets and by drawing efficient frontiers, we found the optimal portfolio for each cycle regime. Finally we tested the performance of those optimal portfolio switching strategy. The effect is to make lower volatility. The return is almost same but it improved Shape Ratio.

2. Future issues are need for more clear divide of economic cycles and more forward looking expected return model.

3. By switching, the result is the followings.

- Expected return is hard to realized and portfolios with 1.8% return performed in very volatile even after switching.

- With 4% risk portfolios showed more stable performance with making use of each regime’s optimal portfolio shows its strength in a specific regime period.

- Switching strategy outperformed Market weight static portfolio in the sense of Sharpe Ratio and showed the positive effect of switching.



THANK YOU FOR YOUR ATTENTION.

* This is describing an individual opinion and is not expressing a belonging company’s opinion.

Empirical Study of Asset Returns by Economic Cycles and ... › panama2017 › docs ›...

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