RT Journal Article
SR Electronic
T1 Tactical Asset Allocation, Risk Premia, and the Business Cycle: A Macro Regime Approach
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP jpm.2022.1.456
DO 10.3905/jpm.2022.1.456
A1 Alessio de Longis
A1 Dianne Ellis
YR 2022
UL https://pm-research.com/content/early/2022/12/22/jpm.2022.1.456.abstract
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.