Polycyclic Portfolio Rebalancing via an Economy's Relative Information Processing Ratio

Abstract

Procyclical assets tend to rise in value when the economy is expanding and fall with the advent of a recession. Countercyclical assets are instead negatively correlated with the state of the economy. Despite the use of optimization methods, hedging, and ad hoc rebalancing techniques most portfolios are procyclical in behavior and tend to lose value as the economy slows and equity markets fall. In this paper, a new portfolio rebalancing technique is introduced which has the potential to favorably and systematically pivot a portfolio between pro and counter cyclical strategies before regime changes in the economy. This “polycyclic” approach offers potential portfolio returns well above those of traditional methods. This technique can be implemented independently or in conjunction with other portfolio optimization methods.

Keywords: Portfolio Management, Asset Management, Business Cycle, Bull Market, Bear Market, Information Theory, Procyclical, Entropy

JEL Classification: G11, G12, G14, E3, E37, E4, E43, E47