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Dynamic strategic asset allocation: Risk and return across the business cycle

Author

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  • Pim van Vliet

    (Coolsingel 120, NL 3011 AG)

  • David Blitz

Abstract

We propose a practical investment framework for dynamic asset allocation across different phases in the business cycle, which we illustrate using a sample of US data from 1948 to 2007. We identify four phases in the business cycle and find that these capture pronounced time variation in the risk and return properties of asset classes. Time variation is also observed in the risk of a traditional, static strategic asset mix. In order to stabilize risk across the business cycle, we propose a dynamic strategic asset allocation approach, which has the potential to enhance expected return as well. The proposed investment framework is found to be robust to variations in the variable composition of the business cycle indicator and can easily be extended with different economic variables and/or additional assets.

Suggested Citation

  • Pim van Vliet & David Blitz, 2011. "Dynamic strategic asset allocation: Risk and return across the business cycle," Journal of Asset Management, Palgrave Macmillan, vol. 12(5), pages 360-375, November.
    • Handle: RePEc:pal:assmgt:v:12:y:2011:i:5:d:10.1057_jam.2011.12
    DOI: 10.1057/jam.2011.12
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    References listed on IDEAS

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    Cited by:

    1. Min Jeong Kim & Dohyoung Kwon, 2023. "Dynamic asset allocation strategy: an economic regime approach," Journal of Asset Management, Palgrave Macmillan, vol. 24(2), pages 136-147, March.
    2. Yizhan Shu & Chenyu Yu & John M. Mulvey, 2024. "Downside risk reduction using regime-switching signals: a statistical jump model approach," Journal of Asset Management, Palgrave Macmillan, vol. 25(5), pages 493-507, September.
    3. Narayan, S. & Le, T.-H. & Sriananthakumar, S., 2018. "The influence of terrorism risk on stock market integration: Evidence from eight OECD countries," International Review of Financial Analysis, Elsevier, vol. 58(C), pages 247-259.
    4. Yizhan Shu & Chenyu Yu & John M. Mulvey, 2024. "Downside Risk Reduction Using Regime-Switching Signals: A Statistical Jump Model Approach," Papers 2402.05272, arXiv.org, revised Sep 2024.
    5. Yazid M Sharaiha & Kristoffer Kittilsen Johansson, 2014. "The state-dependent time variation in the value premium," Journal of Asset Management, Palgrave Macmillan, vol. 15(2), pages 150-161, April.

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