PT  - JOURNAL ARTICLE
AU  - Alessio de Longis
AU  - Dianne Ellis
TI  - Tactical Asset Allocation, Risk Premia, and the Business Cycle: A Macro Regime Approach
AID  - 10.3905/jpm.2022.1.456
DP  - 2022 Dec 22
TA  - The Journal of Portfolio Management
PG  - jpm.2022.1.456
4099  - https://pm-research.com/content/early/2022/12/22/jpm.2022.1.456.short
4100  - https://pm-research.com/content/early/2022/12/22/jpm.2022.1.456.full
AB  - Market conditions change over the course of the business cycle. When are investors compensated to take risk? And what type of risk? We propose a practical regime-based framework for tactical asset allocation (TAA), combining leading economic indicators and global risk appetite to identify four macro regimes: recovery, expansion, slowdown, and contraction. We document distinct performance characteristics across regimes for traditional asset classes and their underlying risk factors, focusing on the term premium, credit premium, and equity premium. We provide simple and practical examples of TAA strategies for long-only multi-asset, and fixed income portfolios with the potential to generate attractive excess returns. Results are statistically significant and economically relevant after transaction costs, with information ratios between 0.70 and 0.80.