Detecting change points in VIX and S&P 500: A new approach to dynamic asset allocation
Nystrup, Peter ; Hansson, Bo William ; Madsen, Henrik and Lindström, Erik LU
(2016)
In Journal of Asset Management
17(5).
p.361-374
- Abstract
- The purpose of dynamic asset allocation (DAA) is to overcome the challenge that changing market conditions present to traditional strategic asset allocation by adjusting portfolio weights to take advantage of favorable conditions and reduce potential drawdowns. This article proposes a new approach to DAA that is based on detection of change points without fitting a model with a fixed number of regimes to the data, without estimating any parameters and without assuming a specific distribution of the data. It is examined whether DAA is most profitable when based on changes in the Chicago Board Options Exchange Volatility Index or change points detected in daily returns of the S&P 500 index. In an asset universe consisting of the S&P... (More)
- The purpose of dynamic asset allocation (DAA) is to overcome the challenge that changing market conditions present to traditional strategic asset allocation by adjusting portfolio weights to take advantage of favorable conditions and reduce potential drawdowns. This article proposes a new approach to DAA that is based on detection of change points without fitting a model with a fixed number of regimes to the data, without estimating any parameters and without assuming a specific distribution of the data. It is examined whether DAA is most profitable when based on changes in the Chicago Board Options Exchange Volatility Index or change points detected in daily returns of the S&P 500 index. In an asset universe consisting of the S&P 500 index and cash, it is shown that a dynamic strategy based on detected change points significantly improves the Sharpe ratio and reduces the drawdown risk when compared with a static, fixed-weight benchmark. (Less)
Please use this url to cite or link to this publication:
https://lup.lub.lu.se/record/0bb0fd6d-a20b-4aef-9d61-de9660d1ecb6
- author
- Nystrup, Peter
; Hansson, Bo William
; Madsen, Henrik
and Lindström, Erik
LU
- organization
- publishing date
- 2016-09
- type
- Contribution to journal
- publication status
- published
- subject
- keywords
- regime changes, change point detection, dynamic asset allocation, volatility regimes, daily returns, non-parametric statistics
- in
- Journal of Asset Management
- volume
- 17
- issue
- 5
- pages
- 361 - 374
- publisher
- Palgrave Macmillan
- external identifiers
-
- scopus:85011067324
- wos:000391017900005
- ISSN
- 1470-8272
- DOI
- 10.1057/jam.2016.12
- language
- English
- LU publication?
- yes
- id
- 0bb0fd6d-a20b-4aef-9d61-de9660d1ecb6
- date added to LUP
- 2016-05-13 08:49:07
- date last changed
- 2022-04-24 07:34:18
@article{0bb0fd6d-a20b-4aef-9d61-de9660d1ecb6,
abstract = {{The purpose of dynamic asset allocation (DAA) is to overcome the challenge that changing market conditions present to traditional strategic asset allocation by adjusting portfolio weights to take advantage of favorable conditions and reduce potential drawdowns. This article proposes a new approach to DAA that is based on detection of change points without fitting a model with a fixed number of regimes to the data, without estimating any parameters and without assuming a specific distribution of the data. It is examined whether DAA is most profitable when based on changes in the Chicago Board Options Exchange Volatility Index or change points detected in daily returns of the S&P 500 index. In an asset universe consisting of the S&P 500 index and cash, it is shown that a dynamic strategy based on detected change points significantly improves the Sharpe ratio and reduces the drawdown risk when compared with a static, fixed-weight benchmark.}},
author = {{Nystrup, Peter and Hansson, Bo William and Madsen, Henrik and Lindström, Erik}},
issn = {{1470-8272}},
keywords = {{regime changes; change point detection; dynamic asset allocation; volatility regimes; daily returns; non-parametric statistics}},
language = {{eng}},
number = {{5}},
pages = {{361--374}},
publisher = {{Palgrave Macmillan}},
series = {{Journal of Asset Management}},
title = {{Detecting change points in VIX and S&P 500: A new approach to dynamic asset allocation}},
url = {{http://dx.doi.org/10.1057/jam.2016.12}},
doi = {{10.1057/jam.2016.12}},
volume = {{17}},
year = {{2016}},
}