Most asset allocation approaches are more or less static. From 60/40 to Risk Parity, such allocations can be easily replicated with a couple ETF’s, and so the outcomes of static asset allocation portfolios, especially the risks such as drawdowns, are 90%+ pre-determined.
There is a strand of academic research that focuses on an alternative approach called Dynamic Asset Allocation. Unlike static allocations, the dynamic approach allows for significant adjustments in asset class weights over time. These allocations are determined by an investment process that is either rules-based or subjective.
The rules-based approaches typically involve a combination of forecasted expected returns, risk, constraints, and historical simulation.
Unlike static allocations, the dynamic strategies are harder to replicate with a fixed combination of ETF’s because in addition to the underlying asset class risks Dynamic Asset Allocation introduces strategy risk (see here and here) into portfolios. When properly constructed, strategy risk can become an important source of return and diversification, helping address the Two Risks that Ruin Long-Run Investing.
Below is a collection of academic papers that discuss the benefits of various Dynamic Asset Allocation approaches.
Sorted by Year
Arnott, Robert D. and James N. von Germeten, 1983, Systematic Asset Allocation, Research Affiliates
Perold, Andre and William F. Sharpe, 1988, Dynamic Strategies for Asset Allocation, FAJ
Sorensen, Carsten, 1999, Dynamic Asset Allocation and Fixed Income Management, JFQA
Berkelaar, Arjan B. and Kouwenberg, Roy R. P., 2000, Dynamic Asset Allocation and Downside-Risk Aversion. Econometric Institute Report, SSRN
Bajeux‐Besnainou, Isabelle, James V. Jordan and Roland Portrait, 2003, Dynamic Asset Allocation for Stocks, Bonds, and Cash, Journal of Business
Pola, Gianni and Giordano Pola, 2006, Optimal Dynamic Asset Allocation: A Stochastic Invariance Approach, IEEE
Basu, Devraj and Hung, Chi-Hsiou Daniel and Oomen, Roel C.A. and Stremme, Alexander, 2006, Do Sentiment Indicators Improve Dynamic Asset Allocation? SSRN
Faber, Meb, 2007, A Quantitative Approach to Tactical Asset Allocation. The Journal of Wealth Management, SSRN
Basak, Suleyman and Chabakauri, Georgy, 2009, Dynamic Mean-Variance Asset Allocation, SSRN
Blitz, David and van Vliet, Pim, 2009, Dynamic Strategic Asset Allocation: Risk and Return Across Economic Regimes, SSRN
Picerno, James, 2010, Dynamic Asset Allocation: Modern Portfolio Theory Updated for the Smart Investor, Book
Pedersen, Thomas Quistgaard, 2010, Return Predictability and Dynamic Asset Allocation, Thesis
Maillard, Didier, 2011, Dynamic Versus Static Asset Allocation: From Theory (Halfway) to Practice, SSRN
Yang, Zhaoji George and Zhong, Liang, 2012, Optimal Portfolio Strategy to Control Maximum Drawdown - The Case of Risk-Based Dynamic Asset Allocation, SSRN
Butler, Adam and Philbrick, Mike and Gordillo, Rodrigo and Varadi, David, 2012, Adaptive Asset Allocation: A Primer, SSRN
Wang, Peng, Rodney Sullivan, Yizhi Ge, 2012, Risk-Based Dynamic Asset Allocation with Extreme Tails and Correlations, JPM
Cardinale, Mirko, Marco Navone and Andrzej Pioch, 2014, The Power of Dynamic Asset Allocation, JPM
Almadi, Himanshu, David Rapach and Anil Suri, 2014, Return Predictability and Dynamic Asset Allocation: How Often Should Investors Rebalance? JPM
Du Plessis, Johannes Paulus and Hallerbach, Winfried George, 2015, Volatility Weighting Applied to Momentum Strategies. Journal of Alternative Investments, Forthcoming, SSRN
Petre, Gabriel, 2015, A Case for Dynamic Asset Allocation for Long Term Investors. Procedia Economics and Finance. 29.
Keller, Wouter J. and Butler, Adam and Kipnis, Ilya, 2015, Momentum and Markowitz: A Golden Combination, SSRN
Howe, Thomas S and Pope, Ralph, 2015, Long-Run Performance of Dynamic Asset Allocation Strategies, SSRN
Madhogarhia Pawan and Marco Lam, 2015, Dynamic Asset Allocation, Journal of Asset Management
An, Byeong-Je, Andrew Ang, Pierre Collin-Dufresne, 2015, How Often Should You Take Tactical Asset Allocation Decisions? FMA
Moreira, Alan and Muir, Tyler, 2016, Volatility-Managed Portfolios. Journal of Finance, Forthcoming, SSRN
Grennon, Terence, 2016, A Dynamic Asset Allocation Approach to Investing, SSRN
Hamill, Carl, Rattray, Sandy, Van Hemert, Otto, 2016, Trend Following: Equity and Bond Crisis Alpha, SSRN
Dreyer, Anna and Hubrich, Stefan, 2017, Tail Risk Mitigation with Managed Volatility Strategies, SSRN
van Zundert, Jeroen, 2017, Volatility-Adjusted Momentum, SSRN
Harris, Richard D. F. and Stoja, Evarist and Tan, Linzhi, 2017, The Dynamic Black-Litterman Approach to Asset Allocation, SSRN
Harvey, Campbell R. and Hoyle, Edward and Korgaonkar, Russell and Rattray, Sandy and Sargaison, Matthew and van Hemert, Otto, 2018, The Impact of Volatility Targeting, SSRN
Harvey, Campbell R. and Hoyle, Edward and Rattray, Sandy and Sargaison, Matthew and Taylor, Dan and van Hemert, Otto, 2019, The Best of Strategies for the Worst of Times: Can Portfolios be Crisis Proofed? SSRN
Rattray, Sandy, Granger, Nicolas, Harvey, Campbell, Van Hemert, Otto 2019, Strategic Rebalancing, SSRN
Karris, Michael, 2019, Alpha, Beta and the Endowment Model, SSRN
Raymond, Micaletti, 2020, Towards a Better Fed Model, SSRN
Clark, Joseph and Swan, Robert, 2020, Dynamic Asset Allocation With Options, SSRN
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