A1920
Title: Persistence-based portfolio choice along the FOMC cycle
Authors: Federico Severino - Universite Laval (Canada) [presenting]
Fulvio Ortu - Universita Bocconi (Italy)
Pietro Reggiani - New York University (United States)
Abstract: The Federal Reserve holds two main sets of monetary policy meetings, the 'Federal Open Market Committee' (FOMC) and the 'Board Meetings', which gather with a 6-week and 2-week cadence, respectively. The cadence of these meetings has been shown to be associated with cycles of corresponding frequency in stock markets. These can be fruitfully exploited through a portfolio strategy that invests in the whole market at alternate weeks (even-week strategy). This simple investment rule is based on the cycles identified empirically but, so far, lacks a theoretical foundation. We provide a rigorous framework to detect cycles in the stock market, and to determine optimal portfolio choices that profit from such cycles. We use a filtering approach for stationary time series to isolate uncorrelated components of stock returns that are precisely associated with two- and six-week cycles. Then, we replicate these components using tradeable assets from the U.S. market, and design an optimal portfolio strategy that maximizes the investors' wealth and outperforms the even-week strategy.
