Portfolio Tilts using Views on Macroeconomic Regimes

Posted: 24 Mar 2021 Last revised: 19 May 2023

See all articles by Redouane Elkamhi

Redouane Elkamhi

University of Toronto - Rotman School of Management

Jacky S.H. Lee

Healthcare of Ontario Pension Plan Trust Fund

Marco Salerno

Healthcare of Ontario Pension Plan Trust Fund

Date Written: February 1, 2021

Abstract

Long-term investors rebalance their portfolios given their views on the investment landscape. Portfolio tilting is often implemented using investors' views on point estimates of asset expected returns which are notoriously difficult to estimate and lead to unstable portfolio weights. We avoid such shortcomings by providing a methodology that incorporates views on the likelihood of economic regimes (e.g., growth and inflation). Using data on equities, bonds and commodities, we show - both in simulation and empirically - that our approach generates stable portfolio weights and a performance that is minimally affected by forecast errors.

Keywords: Portfolio Allocation, Portfolio Construction, Portfolio Theory, Factors

JEL Classification: G11

Suggested Citation

Elkamhi, Redouane and Lee, Jacky and Salerno, Marco, Portfolio Tilts using Views on Macroeconomic Regimes (February 1, 2021). The Journal of Portfolio Management, 49(3), 7-24, DOI: 10.3905/jpm.2022.1.438, Available at SSRN: https://ssrn.com/abstract=3810877 or http://dx.doi.org/10.2139/ssrn.3810877

Redouane Elkamhi

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Jacky Lee

Healthcare of Ontario Pension Plan Trust Fund ( email )

1 York Street
Toronto, Ontario M5J0B6
Canada

Marco Salerno (Contact Author)

Healthcare of Ontario Pension Plan Trust Fund ( email )

1 York
Toronto, Ontario M5S 3G8
Canada

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