Dynamic Signal Weighting: When it is Expected to Add Value and When it is Not

Abstract

An investment strategy can combine different styles or signals. The simplest approach for combining these signals consists in using a weighting system that does not change over time. However, significant regime switches are not taken into account. This article shows that a dynamic signal weighting approach adds significant value compared to the static approach under specific conditions. First of all, it is necessary to significantly discriminate the performance of signals in different contexts. But interestingly, this is not a sufficient condition. The correlation between signal performances also matters. An analysis of the diversification benefits provided by each signal is necessary before deciding whether to adopt a dynamic signal weighting approach.

Keywords: active portfolio management, contextual analysis, alpha model

JEL Classification: D40, G12