Dynamic asset allocation strategy: an economic regime approach

Min Jeong Kim () and Dohyoung Kwon ()
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Min Jeong Kim: Samsung Life Insurance
Dohyoung Kwon: Gachon University

Journal of Asset Management, 2023, vol. 24, issue 2, No 5, 136-147

Abstract: Abstract This paper presents a practical investment framework for dynamic asset allocation strategies based on changes in the macro-environment. To identify economic regimes, we use macro-indicators that track monthly growth and inflation of the US economy. We then demonstrate that the regimes divided by changes in growth and inflation trends successfully partition the historical performance of asset classes, and construct a regime-based dynamic strategy for shifting exposures toward attractive assets according to economic regimes. Out-of-sample analysis suggests that the dynamic approach outperforms the static approach after accounting for transaction costs, leading to a higher risk-adjusted return and information ratio. These results have crucial implications for portfolio managers seeking to develop a dynamic asset allocation strategy throughout economic cycles to enhance long-term portfolio performance.

Keywords: Dynamic asset allocation strategy; Economic regimes; $$l _{1}$$ l 1 trend filtering (search for similar items in EconPapers)
JEL-codes: E32 G11 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (3)

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DOI: 10.1057/s41260-022-00296-8

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