Credit-Informed Tactical Asset Allocation

Abstract:     
This paper outlines a tactical asset allocation (TAA) strategy that takes signals from the credit markets and applies them to the stock market. A power model is built using the Russell 2000 equity index and the Bank of America/Merrill Lynch High Yield B index. This model is then used in a tactical asset allocation strategy to judge whether equities are expensive or cheap relative to high yield bonds. Based on back-test results from 1997 to the present, the approach provides equity-like returns while lowering portfolio volatility.

Number of Pages in PDF File: 13

Keywords: Tactical Asset Allocation, Asset Allocation, Quantitative, Capital Structure Arbitrage, Credit Markets, Market Timing

JEL Classification: C00, C10, G00, G11

working papers series