Liquidity-Driven Dynamic Asset Allocation

Posted: 28 Nov 2012 Last revised: 10 Mar 2016

See all articles by James X. Xiong

James X. Xiong

Morningstar Investment Management

Rodney N Sullivan

University of Virginia, Darden Graduate School of Business

Peng Wang

TIAA Institute - Covariance Capital Management

Date Written: August 28, 2012

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

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: https://ssrn.com/abstract=2181519

James X. Xiong

Morningstar Investment Management ( email )

22 W Washington
Chicago, IL 60602
United States

Rodney N Sullivan (Contact Author)

University of Virginia, Darden Graduate School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-243-0644 (Phone)

Peng Wang

TIAA Institute - Covariance Capital Management ( email )

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

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
3,284
PlumX Metrics