On the Importance of Time Variability in Higher Moments for Asset Allocation

It is well known that strategies that allow investors to allocate their wealth using return and volatility forecasts, the use of which are termed market and volatility timing, are of significant value. In this paper, we show that distribution tim ing, defined here as the ability to use forecasts for moments up to the fourth one, yields significant incremental economic value. By considering the weekly asset allocation among the five largest international stock markets, we find that distribution timing yields a gain of around 140 basis points per year over the last decade. To control for the parameter uncertainty of the model, we cast the model into a Bayesian setting. We also consider alternative preference structures and model specifications. In all cases, the value of distribution timing remains economically significant. ( JEL: G11, F37, C22, C51)