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A Volatility-Driven Asset Allocation (VDAA)

Morel, Christophe; Michel, Thierry; Michel, Laurent (2010), A Volatility-Driven Asset Allocation (VDAA). https://basepub.dauphine.fr/handle/123456789/5954

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VDAA.PDF (470.5Kb)
Type
Document de travail / Working paper
Date
2010
Publisher
Université Paris-Dauphine
Series title
CAHIER DE RECHERCHE DE DRM
Series number
N° 2010-13
Published in
Paris
Pages
19
Metadata
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Author(s)
Morel, Christophe
Michel, Thierry
Michel, Laurent cc
Abstract (EN)
This article advocates a systematic rebalancing process –Volatility-Driven Asset Allocation or VDAA – for dynamically managing the strategic asset allocation. The goal of the suggested algorithm is to adjust the asset exposures so as to reflect the assumptions investors used when determining their strategic allocation, in terms of balance between risk contributions and expected returns. Such an idea makes sense from the economic point of view of a risk-adverse investor who wishes to achieve a smooth long-run performance. The stable risk contribution is determined by a long-run target, with short-term deviations from this target driving the rebalancing of the portfolio exposure. Rebalancing between asset classes allows smoothing the global volatility of the portfolio by decreasing exposure in asset classes yielding temporarily higher risk contributions and by increasing weight in asset classes with temporarily lower risk contributions. Both our backtests and robustness study demonstrate that this risk rebalancing strategy is superior in terms of information ratio to traditional rebalancing rules.
Subjects / Keywords
asset allocation; rebalancing strategy; volatility
JEL
G11 - Portfolio Choice; Investment Decisions
G15 - International Financial Markets

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