Analysis of Asset Classes Through the Business Cycle

Abstract

This study was driven by the dissimilar performance characteristics displayed by asset classes over the business cycle. The authors aim to explore assets classes on the grounds of a scientific literature review and a statistical analysis. Business cycles are divided into four stages to explore broad movements in returns of asset classes and a possible existence of asymmetrical effects of determinants within stages. Six main asset classes were analysed: US stocks, EAFE stocks, Bonds, Gold, Real Estate and Commodities. Monthly data from February 1976 to August 2011 were used for the study. The article combines business cycle and asset allocation theories by adding valuable information about performance of asset classes during different phases of the business cycle. Using the OECD Composite Leading Indicator as a business cycle measure, the authors demonstrate that different assets classes have different return/risk characteristics over the business cycle. The article demonstrates how to use the business cycle approach for investment decision-making. The OECD Composite Leading Indicator can provide significant information on market expectations and the future outlook; hence, results of this study can help every investor improve his/her performance and risk management.

Leading macroeconomic indicators for a dynamic investment strategy

“…Like Dzikevičius and Vetrov (2012a), it seeks to take advantage of the movements of the economic cycle, to increase the performance of a portfolio and contrary to what was found by Han, Li & Yin (2018), where the economic cycles studied through the CLI do not fully reflect the real conditions of the stock markets.…”

“…They found that this indicator could anticipate the movements of the economic cycle, and thus modify the weightings of the stocks and achieve better return/risk efficiency in the portfolio. In another study these authors (Dzikevičius & Vetrov, 2012a) included other financial assets to verify that the OECD indicator could provide information on return expectations. They found that asset classes behave in a different way along the OECD business cycle, showing that the CLI can provide significant information on financial market expectations.…”

Evaluation of factors leading to formation of price-bubbles in the real estate market of Lithuania

“…Guessing of the future business cycle is very complicated. When the eco nomy is at its recession, neither its duration nor its severity are known; moreover, the effects of a crisis are different in different sectors of the economy, which makes the assess ment of a country's economic situation even more difficult (Dzikevičius, Vetrov 2012).…”

Designing a Portfolio Based On Risk and Return of Various Asset Classes

“…Allocation in each of these asset classes needs to be a well-educated decision. Dzikevicius and Vetrov (2012) combined business cycle and asset allocation theories by adding valuable information about performance of asset classes during different phases of the business cycle and demonstrated that different asset classes have different return/risk characteristics over the business cycle. They thus demonstrated how business cycle approach can be used for decision making.…”

“…Different asset classes perform differently at different points of time. The performance is affected by the business cycle (Dzikevicius & Vetrov, 2012) as well as other local and global macroeconomic parameters. Crude oil, real estate, gold etc.…”