Tactical Asset Allocation with Macroeconomic Factors

Abstract

Tactical asset allocation is explored using an economic-based factor pricing model. Using a filtering method based on asset responses to the economy and current economic data, alternative optimization methods are considered including equally-weighted, low-volatility, and mean-variance (maximum Sharpe ratio) allocations. Using exchange-traded funds as proxies for asset classes, portfolios were constructed and rebalanced every half year from 2006 through 2013. We find that the economic response filtering with the maximum Sharpe ratio optimization provided the best overall performance in terms of returns while the low- (economic) volatility portfolio had the least volatility.

TOPICS: Exchange-traded funds and applications, portfolio construction, performance measurement