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Portfolio Tilts Using Views on Macroeconomic Regimes

Year
Secondary
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Abstract
1. Redouane Elkamhi 1. is an associate professor of finance in the Rotman School of Management at the University of Toronto in Toronto, Ontario, Canada. (redouane.elkamhi{at}rotman.utoronto.ca) 2. Jacky S. H. Lee 1. is the senior managing director of the Total Portfolio Group at Healthcare of Ontario Pension Plan Trust Fund in Toronto, Ontario, Canada. (jlee5{at}hoopp.com) 3. Marco Salerno 1. is a principal of the Total Portfolio Group at Healthcare of Ontario Pension Plan Trust Fund in Toronto, Ontario, Canada. (msalerno{at}hoopp.com) Long-term investors tilt their portfolios given their views on the evolving investment landscape. In the literature, portfolio tilting is often implemented with methodologies that use investors’ views on point estimates of conditional assets’ expected returns. These conditional return expectations are notoriously difficult to estimate, and using them often results in unstable portfolio weights when existing methodologies are applied. We avoid such shortcomings by providing a methodology that incorporates views on the likelihood of economic regimes (e.g., growth and inflation surprises) instead. Using data on equities, bonds, and commodities, we show—both in simulation and empirically—that our approach generates stable portfolio weights and outperformance that is minimally affected by forecast errors.
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jpm.pm-research.com
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Journal
https://jpm.pm-research.com/content/early/2022/11/21/jpm.2022.1.438
Published
2022/11/21
Retrieved
2022/11/21 19:49
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