RT Journal Article
SR Electronic
T1 Dynamic Allocation or Diversification: <em>A Regime-Based Approach to Multiple Assets</em>
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 62
OP 73
DO 10.3905/jpm.2018.44.2.062
VO 44
IS 2
A1 Peter Nystrup
A1 Bo William Hansen
A1 Henrik Olejasz Larsen
A1 Henrik Madsen
A1 Erik Lindström
YR 2017
UL https://pm-research.com/content/44/2/62.abstract
AB This article investigates whether regime-based asset allocation can effectively respond to changes in financial regimes at the portfolio level in an effort to provide better long-term results when compared to a static 60/40 benchmark. The potential benefit from taking large positions in a few assets at a time comes at the cost of reduced diversification. The authors analyze this trade-off in a multi-asset universe with great potential for static diversification. The regime-based approach is centered around a regime-switching model with time-varying parameters that can match financial markets’ behavior and a new, more intuitive way of inferring the hidden market regimes. The empirical results show that regime-based asset allocation is profitable, even when compared to a diversified benchmark portfolio. The results are robust because they are based on available market data with no assumptions about forecasting skills.TOPIC: Portfolio construction