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Article

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

Peter Nystrup, Bo William Hansen, Henrik Olejasz Larsen, Henrik Madsen and Erik Lindström
The Journal of Portfolio Management Multi-Asset Special Issue 2018, 44 (2) 62-73; DOI: https://doi.org/10.3905/jpm.2018.44.2.062
Peter Nystrup
is an industrial Ph.D. student at Sampension in Hellerup, Denmark, and in the department of applied mathematics and computer science at Technical University of Denmark in Lyngby, Denmark
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Bo William Hansen
is the head of investment analysis at Sampension in Hellerup, Denmark
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Henrik Olejasz Larsen
is the CIO at Sampension in Hellerup, Denmark, and an external associate professor in the department of economics at Copenhagen University in Copenhagen, Denmark
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Henrik Madsen
is a professor and head of the section for dynamical systems in the department of applied mathematics and computer science at Technical University of Denmark in Lyngby, Denmark
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Erik Lindström
is a professor at the Centre for Mathematical Sciences at Lund University in Lund, Sweden
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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.

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The Journal of Portfolio Management: 44 (2)
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Multi-Asset Special Issue 2018
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Dynamic Allocation or Diversification: A Regime-Based Approach to Multiple Assets
Peter Nystrup, Bo William Hansen, Henrik Olejasz Larsen, Henrik Madsen, Erik Lindström
The Journal of Portfolio Management Dec 2017, 44 (2) 62-73; DOI: 10.3905/jpm.2018.44.2.062

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Dynamic Allocation or Diversification: A Regime-Based Approach to Multiple Assets
Peter Nystrup, Bo William Hansen, Henrik Olejasz Larsen, Henrik Madsen, Erik Lindström
The Journal of Portfolio Management Dec 2017, 44 (2) 62-73; DOI: 10.3905/jpm.2018.44.2.062
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    • Abstract
    • ASSET UNIVERSE
    • THE HIDDEN MARKOV MODEL
    • STATE INFERENCE
    • EMPIRICAL RESULTS
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