Regime-Based Tactical Allocation for Equity Factors and Balanced Portfolios

24 Pages Posted: 6 Jul 2017

See all articles by Emlyn James Flint

Emlyn James Flint

Legae Peresec; Department of Actuarial Science, University of Cape Town

Florence Chikurunhe

Peregrine Securities

Anthony Seymour

University of Cape Town (UCT)

Date Written: July 5, 2017

Abstract

It is now an accepted fact that the majority of financial markets worldwide are neither normal nor constant, and South Africa is no exception. One idea that can be used to understand such markets and has been gaining popularity recently is that of regimes and regime-switching models. In this research, we consider whether regimes can add value to the asset allocation process. Four methods for regime identification – economic cycle variables, fundamental valuation metrics, technical market indicators and statistical regime-switching models – are discussed and tested on two asset universes – long-only South African equity factor returns and representative balanced portfolio asset class returns. We find several promising regime indicators and use these to create two regime-based tactical allocation frameworks. Out-of-sample testing on both the equity factor and balanced asset class data shows very promising results, with both regime-based tactical strategies outperforming their respective static benchmarks on an absolute return and risk-adjusted return basis.

Keywords: Regime-switching models, tactical asset allocation, equity factors, balanced portfolios, market timing

JEL Classification: C01, C02, C21, C22, C31, C32, C51, C52, C53, C61, G12, G14

Suggested Citation

Flint, Emlyn James and Chikurunhe, Florence and Seymour, Anthony, Regime-Based Tactical Allocation for Equity Factors and Balanced Portfolios (July 5, 2017). Available at SSRN: https://ssrn.com/abstract=2997410 or http://dx.doi.org/10.2139/ssrn.2997410

Emlyn James Flint (Contact Author)

Legae Peresec ( email )

15 Cavendish Street
Claremont
Cape Town, Western Cape 7700
South Africa
27117227556 (Phone)

HOME PAGE: http://www.legaeperesec.co.za

Department of Actuarial Science, University of Cape Town ( email )

Actuarial Science Section, University of Cape Town
Private Bag X3, Rondebosch
Cape Town, Western Cape 7701
South Africa
+27 21 650 2475 (Phone)

Florence Chikurunhe

Peregrine Securities ( email )

21 Main Road
Claremont
Cape Town, Western Cape 7700
South Africa
+27117227551 (Phone)

HOME PAGE: http://www.peregrine.co.za

Anthony Seymour

University of Cape Town (UCT) ( email )

Private Bag X3
Rondebosch, Western Cape 7701
South Africa

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