Liquidity Regimes and Optimal Dynamic Asset Allocation

Pierre Collin-Dufresne, Kent Daniel and Mehmet Saǧlam

No 24222, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We solve a portfolio choice problem when expected returns, volatilities and trading-costs follow a regime-switching model. The optimal policy trades towards an aim portfolio given by a weighted-average of the conditional mean-variance portfolios in all future states. The trading speed is higher in more persistent, riskier and higher-liquidity states. It can be optimal to overweight low Sharpe-ratio assets such as Treasury bonds because they remain liquid even in crisis states. We illustrate our methodology by constructing an optimal US equity market timing portfolio based on an estimated regime-switching model and on trading costs estimated using a large-order institutional trading dataset.

JEL-codes: D53 G11 G12 (search for similar items in EconPapers)
Date: 2018-01
Note: AP
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Citations: View citations in EconPapers (1)

Published as Pierre Collin-Dufresne & Kent Daniel & Mehmet Sağlam, 2019. "Liquidity regimes and optimal dynamic asset allocation," Journal of Financial Economics, .

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Related works:
Journal Article: Liquidity regimes and optimal dynamic asset allocation (2020)
Working Paper: Liquidity Regimes and Optimal Dynamic Asset Allocation (2018)
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