Continuous Cash-Overlay Filters for a Static Growth--Defensive Risk Sleeve: Slow-Tail Compensation, V-Shape Crash Brakes, Walk-Forward Validation, and Max-Cash Combination

Zheli Xiong

Papers from arXiv.org

Abstract: This paper studies a modular cash-overlay rule for allocating between a fixed growth-defensive risky sleeve R and interest-bearing cash C. The risky sleeve is a static 50/50 combination of equal-weight growth/technology and defensive income/value ETF baskets; the target is future R-C return, with the cash leg earning the contemporaneous cash rate. Two independent filters are tested. The slow-tail filter maps continuous compensation, rate-headwind, risk-premium-compression, and rate-path-stress states into a cash weight with a 30% material-trade gate. The V-shape filter is a fast crash brake based on continuous VIX, rate, credit, drawdown, and re-entry states. A fixed max-cash layer then uses the larger cash weight requested by either filter each day. On the 2017-2026 common window, the selected max-cash combination earns an 18.83% CAGR versus 16.62% for 100% R and reduces maximum drawdown from -33.59% to -18.05%. In the main walk-forward OOS window, the expanding combination earns 19.35% versus 17.59% for 100% R, with maximum drawdown of -22.05% versus -33.59%; the rolling version earns 18.50% with the same -22.05% drawdown. Post-2022 tests show lower drawdown but lower CAGR during a strong risky-sleeve rebound. The results support modular cash overlays as drawdown-control tools rather than standalone return-enhancement claims; fully real-time variable re-screening and multiple-testing-adjusted inference remain future work.

Date: 2026-06, Revised 2026-06
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