Strategic Asset Allocation with Heterogeneous Beliefs

We study the presence of long term investors using different return forecasting strategies and switching them based on their past performance generates the price trends observed in financial markets. In the empirical section, we assume that investors choose how to allocate their portfoilios among four major stock indices: Dow Jones, FTSE, Nikkei and Hand 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.