Advanced

Detecting change points in VIX and S&P 500: A new approach to dynamic asset allocation

Peter, Nystrup; Bo William, Hansson; 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:
author
organization
publishing date
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
external identifiers
  • scopus:85011067324
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
2017-02-12 04:32:58
@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       = {Peter, Nystrup and Bo William, Hansson and Madsen, Henrik and Lindström, Erik},
  keyword      = {regime changes,change point detection,dynamic asset allocation,volatility regimes,daily returns,non-parametric statistics},
  language     = {eng},
  number       = {5},
  pages        = {361--374},
  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 },
  volume       = {17},
  year         = {2016},
}