PT - JOURNAL ARTICLE AU - James X. Xiong AU - Rodney N. Sullivan AU - Peng Wang TI - Liquidity-Driven Dynamic Asset Allocation AID - 10.3905/jpm.2013.39.3.102 DP - 2013 Apr 30 TA - The Journal of Portfolio Management PG - 102--111 VI - 39 IP - 3 4099 - https://pm-research.com/content/39/3/102.short 4100 - https://pm-research.com/content/39/3/102.full AB - The authors propose a model of portfolio selection that adjusts an investor’s portfolio allocation in accordance with changing market conditions and liquidity environments. They found that market liquidity provides a useful leading indicator in dynamic asset allocation. Specifically, market-liquidity risk-premium cycles anticipate economic and market cycles. Investors can therefore avoid markets with low liquidity premiums, waiting for more favorable circumstances to extract liquidity risk premiums. The result meaningfully enhanced portfolio performance through economic and market cycles, and is robust to transactions costs and alternate specifications.TOPICS: Portfolio construction, factor-based models, in markets