Risk-Based Dynamic Asset Allocation with Extreme Tails and Correlations

3 Pages Posted: 14 Jan 2012 Last revised: 10 Aug 2012

Peng Wang

TIAA Institute - Covariance Capital Management

Rodney N Sullivan

AQR Capital Management

Yizhi Ge

Georgetown University

Date Written: March 5, 2012

Abstract

We propose a unique dynamic portfolio construction framework that improves portfolio performance by adjusting asset allocation in accordance with a forecast of market risk. We find that modifying asset allocation according to our market risk barometer offers investors the promising opportunity to meaningfully enhance portfolio performance across market environments.

Keywords: Extreme Tail Risk, CVaR Optimization, Regime Change, Markov Switching Model, Dynamic Asset Allocation, TAA

Suggested Citation

Wang, Peng and Sullivan, Rodney N and Ge, Yizhi, Risk-Based Dynamic Asset Allocation with Extreme Tails and Correlations (March 5, 2012). Journalof Portfolio Management, Vol. 38, No. 4, 2012. Available at SSRN: https://ssrn.com/abstract=1984226 or http://dx.doi.org/10.2139/ssrn.1984226

Peng Wang (Contact Author)

TIAA Institute - Covariance Capital Management ( email )

1221 McKinney St. Suite 1800
Houston, TX 77010
United States

Rodney N Sullivan

AQR Capital Management ( email )

Two Greenwich Plza
Greenwich, CT 06830
United States

HOME PAGE: http://www.aqr.com/Home.aspx

Yizhi Ge

Georgetown University ( email )

Washington, DC 20057
United States

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