Breadth Momentum and the Canary Universe: Defensive Asset Allocation (DAA)

24 Pages Posted: 1 Aug 2018  

Wouter J. Keller

VU University Amsterdam

Jan Willem Keuning

TrendXplorer

Date Written: July 12, 2018

Abstract

We improve on our Vigilant Asset Allocation (VAA) by the introduction of a separate “canary” universe for signaling the need for crash protection, using the concept of breadth momentum. The amount of cash is now governed by the number of canary assets with bad (non-positive) momentum. The risky part is still based on relative momentum (or relative strength), just like VAA. We call this strategy Defensive Assets Allocation (DAA). The aim of DAA is to lower the average cash (or bond) fraction while keeping nearly the same degree of crash protection as with VAA. Using a very simple model from Dec 1926 to Dec 1970 with only the SP500 index as risky asset, we find an optimal canary universe of VWO and BND (aka EEM and AGG), which turns out to be rather effective also for nearly all our VAA universes, from Dec 1970 to Mar 2018. The average cash fraction of DAA is often less than half that of VAA’s, while return and risk are similar and for recent years even better. The usage of a separate “canary” universe for signaling the need for crash protection also improves the tracking error with respect to the passive (buy-and-hold) benchmark and limits turnover.

Keywords: Breadth Momentum, Drawdown, Vigilant Momentum, Dual Momentum, Absolute and Relative Momentum, Crash Protection, Backtesting, Datasnooping, DAA, VAA, PAA, TAA

JEL Classification: C00, C10, C22, G00, G11, G10, G14

Suggested Citation

Keller, Wouter J. and Keuning, Jan Willem, Breadth Momentum and the Canary Universe: Defensive Asset Allocation (DAA) (July 12, 2018). Available at SSRN: https://ssrn.com/abstract=3212862 or http://dx.doi.org/10.2139/ssrn.3212862

Wouter J. Keller (Contact Author)

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, NH 1081 HV
Netherlands
+31622392446 (Phone)

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