Using a Value at Risk Approach to Enhance Tactical Asset Allocation

15 Pages Posted: 30 Jan 2006

See all articles by John Okunev

John Okunev

Bond University Business School

Date Written: December 2005


In this paper we present a simple approach of incorporating a Value at Risk (VAR) constraint to tactical asset allocation (TAA). We outline a dynamic VAR TAA strategy which is useful in controlling the risk and expected losses of any balanced product. From our results it is evident that controlling losses can improve returns and at the same time reduce risk. The attractive feature of the strategy is that it is easy to implement and does not require assumptions about the distribution of returns or estimating investor's utility function. In summary, the strategy provides pension fund managers with prescribed tactical tilts in asset allocation which is consistent with their level of risk aversion. The VAR TAA strategy significantly outperforms the buy hold strategy. This approach can be used as a stand alone strategy or can also be used in conjunction with the views of a TAA manager. We show that when the VAR TAA strategy is combined with more traditional TAA strategies this produces a more robust investment process with improved information ratios.

Keywords: Tactical Asset Allocation, Value at Risk

JEL Classification: G11,G14

Suggested Citation

Okunev, John, Using a Value at Risk Approach to Enhance Tactical Asset Allocation (December 2005). Available at SSRN: or

John Okunev (Contact Author)

Bond University Business School ( email )

Gold Coast

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