Abstract
This article asks whether it is possible to diversify investments through time—a hotly debated topic, and one that divides academics and practitioners perhaps like no other financial paradigm. In the late 1960s, Samuelson first argued strongly against the existence of time diversification. Since then, other academics have raised a theoretical challenge to the notion of time diversification. On the other hand, empirical evidence has hardly supported their view. To date, the question still remains wide open: Does time diversification exist? If so, what are the policy implications for asset allocation? This article addresses the gap between theory and empirical evidence by reexamining these issues using a time series framework. Three time series models are fitted with historical data on S&P 500 Index and T-bill and T-bond returns over the period 1802–2002. Although both T-bill and T-bond returns are found to evolve in different serial correlated stationary processes, stock returns are consistent with a mean-reversion process. The change in relative riskiness of stock over bill and bond returns as a result of different time diversification effects strongly supports the conventional recommendation on asset allocation policy with different investment horizons.
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