A Volatility-Driven Asset Allocation (VDAA)
This article advocates a systematic rebalancing process –Volatility-Driven Asset Allocation or VDAA – for dynamically managing the strategic asset allocation. The goal of the suggested algorithm is to adjust the asset exposures so as to reflect the assumptions investors used when determining their strategic allocation, in terms of balance between risk contributions and expected returns. Such an idea makes sense from the economic point of view of a risk-adverse investor who wishes to achieve a smooth long-run performance. The stable risk contribution is determined by a long-run target, with short-term deviations from this target driving the rebalancing of the portfolio exposure. Rebalancing between asset classes allows smoothing the global volatility of the portfolio by decreasing exposure in asset classes yielding temporarily higher risk contributions and by increasing weight in asset classes with temporarily lower risk contributions. Both our backtests and robustness study demonstrate that this risk rebalancing strategy is superior in terms of information ratio to traditional rebalancing rules.
|Date of creation:||2010|
|Date of revision:|
|Publication status:||Published in CAHIER DE RECHERCHE DE DRM, 2010|
|Contact details of provider:|| Web page: http://www.dauphine.fr/en/welcome.html|
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Francis X. Diebold & Kamil Yilmaz, 2008.
"Macroeconomic Volatility and Stock Market Volatility, World-Wide,"
PIER Working Paper Archive
08-031, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
- Francis X. Diebold & Kamil Yilmaz, 2008. "Macroeconomic Volatility and Stock Market Volatility, Worldwide," NBER Working Papers 14269, National Bureau of Economic Research, Inc.
- Francis X. Diebold & Kamil Yılmaz, 2007. "Macroeconomic Volatility and Stock Market Volatility,World-Wide," Koç University-TUSIAD Economic Research Forum Working Papers 0711, Koc University-TUSIAD Economic Research Forum.
- Wessel Marquering & Marno Verbeek, 2000.
"The Economic Value of Predicting Stock Index Returns and Volatility,"
Center for Economic Studies - Discussion papers
ces0020, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
- Marquering, Wessel & Verbeek, Marno, 2004. "The Economic Value of Predicting Stock Index Returns and Volatility," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(02), pages 407-429, June.
- Marquering, W.A. & Verbeek, M.J.C.M., 2001. "The Economic Value of Predicting Stock Index Returns and Volatility," ERIM Report Series Research in Management ERS-2001-75-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
- Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-87, September.
- Merton, Robert C., 1980.
"On estimating the expected return on the market : An exploratory investigation,"
Journal of Financial Economics,
Elsevier, vol. 8(4), pages 323-361, December.
- Robert C. Merton, 1980. "On Estimating the Expected Return on the Market: An Exploratory Investigation," NBER Working Papers 0444, National Bureau of Economic Research, Inc.
- Jun Liu & Francis A. Longstaff & Jun Pan, 2002.
"Dynamic Asset Allocation With Event Risk,"
NBER Working Papers
9103, National Bureau of Economic Research, Inc.
- Liu, Jun & Longstaff, Francis & Pan, Jun, 2001. "Dynamic Asset Allocation with Event Risk," University of California at Los Angeles, Anderson Graduate School of Management qt9fm6t5nb, Anderson Graduate School of Management, UCLA.
- Banerjee, Anindya & Urga, Giovanni, 2005. "Modelling structural breaks, long memory and stock market volatility: an overview," Journal of Econometrics, Elsevier, vol. 129(1-2), pages 1-34.
- Lu, Yang K. & Perron, Pierre, 2010.
"Modeling and forecasting stock return volatility using a random level shift model,"
Journal of Empirical Finance,
Elsevier, vol. 17(1), pages 138-156, January.
- Yang K. Lu & Pierre Perron, 2008. "Modeling and Forecasting Stock Return Volatility Using a Random Level Shift Model," Boston University - Department of Economics - Working Papers Series wp2008-012, Boston University - Department of Economics.
- Jeff Fleming, 2001. "The Economic Value of Volatility Timing," Journal of Finance, American Finance Association, vol. 56(1), pages 329-352, 02.
- Clark, Peter K, 1973. "A Subordinated Stochastic Process Model with Finite Variance for Speculative Prices," Econometrica, Econometric Society, vol. 41(1), pages 135-55, January.
- Fleming, Jeff & Kirby, Chris & Ostdiek, Barbara, 2003. "The economic value of volatility timing using "realized" volatility," Journal of Financial Economics, Elsevier, vol. 67(3), pages 473-509, March.
When requesting a correction, please mention this item's handle: RePEc:dau:papers:123456789/5954. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Alexandre Faure)
If references are entirely missing, you can add them using this form.