Abstract

http://ssrn.com/abstract=2181519
 


 



Liquidity-Driven Dynamic Asset Allocation


James X. Xiong


Ibbotson Associates

Rodney N Sullivan


AQR Capital Management

Peng Wang


University of Virginia - Investment Management Company

August 28, 2012

Journal of Portfolio Management, Forthcoming

Abstract:     
We propose a model of portfolio selection that adjusts an investors’ portfolio allocation in accordance with changing market liquidity environments and market conditions. We found that market liquidity provides a useful “leading indicator” in dynamic asset allocation. Specifically, market liquidity risk premium cycles anticipate economic and market cycles. Investors can therefore act to avoid markets with low liquidity premiums, waiting to extract liquidity risk premiums when the likelihood of extracting a liquidity premium improves. The result, meaningfully enhanced portfolio performance through economic and market cycles, and is robust to transactions costs and alternate specifications.

Keywords: asset allocation, dynamic asset allocation, liquidity

JEL Classification: G1, G12

Accepted Paper Series





Not Available For Download

Date posted: November 28, 2012 ; Last revised: June 19, 2014

Suggested Citation

Xiong, James X. and Sullivan, Rodney N and Wang, Peng, Liquidity-Driven Dynamic Asset Allocation (August 28, 2012). Journal of Portfolio Management, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2181519

Contact Information

James X. Xiong
Ibbotson Associates ( email )
United States
Rodney N Sullivan (Contact Author)
AQR Capital Management ( email )
Two Greenwich Plza
Greenwich, CT 06830
United States
HOME PAGE: http://www.aqr.com/Home.aspx
Peng Wang
University of Virginia (UVA) - Investment Management Company ( email )
Post Office Box 400215
Charlottesville, VA 22904-4215
United States
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