Strategic asset allocation with heterogeneous beliefs

We study how the presence of long term investors using di¤erent return forecasting strategies and switching them based on their past performance generates the price trends observed in …nancial markets. In the empirical section, we assume that investors choose how to allocate their portfolios among four major stock indices: Dow Jones, FTSE, Nikkei and Hang Seng. The exercise shows that a decrease in the proportion of fundamentalists is related to movements in prices that are subsequentialy reverted. In this paper, we bridge the literatures on intertemporal asset allocation and on heterogeneous beliefs. The interaction between two switching types of agents, e.g. fundamentalists and chartists, is responsible for endogenously generating the observed price trends. Key words: asset pricing, intertemporal asset allocation, heterogeneous beliefs, adaptative learning. JEL classi…cation numbers: G11, G12, D83, D84 *I would like to thank Marcelo Fernandes for helpful discussions and academic support.I would also like to thank the participants of the ICEEE 2009, INFINITI 2010 and Giovanni Cespa for their comments. The usual disclaimer applies.