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Dynamic Allocation or Diversification : A Regime-Based Approach to Multiple Assets

Nystrup, Peter; Hansen, Bo William; Olejasz Larsen, Henrik; Madsen, Henrik and Lindström, Erik LU (2017) In Journal of Portfolio Management 44(2). p.62-73
Abstract
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... (More)
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. (Less)
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Contribution to journal
publication status
published
subject
in
Journal of Portfolio Management
volume
44
issue
2
pages
12 pages
publisher
Institutional Investor Journals Group
external identifiers
  • scopus:85041288600
ISSN
0095-4918
DOI
10.3905/jpm.2018.44.2.062
language
English
LU publication?
yes
id
f2308bb6-ff01-42e4-a1d1-3a7521bf0962
date added to LUP
2018-02-12 14:36:41
date last changed
2018-11-21 21:38:01
@article{f2308bb6-ff01-42e4-a1d1-3a7521bf0962,
  abstract     = {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.},
  author       = {Nystrup, Peter and Hansen, Bo William and Olejasz Larsen, Henrik and Madsen, Henrik and Lindström, Erik},
  issn         = {0095-4918},
  language     = {eng},
  number       = {2},
  pages        = {62--73},
  publisher    = {Institutional Investor Journals Group},
  series       = {Journal of Portfolio Management},
  title        = {Dynamic Allocation or Diversification : A Regime-Based Approach to Multiple Assets},
  url          = {http://dx.doi.org/10.3905/jpm.2018.44.2.062},
  volume       = {44},
  year         = {2017},
}