The problem of fat tails is everywhere in risk analysis. It’s a big issue, but there’s no easy solution. There are, however, lots of partial solutions. Each comes with its own set of pros and cons, which implies that the practical strategy for dealing with the messy but essential issues related to measuring and managing risk starts with the iron rule to never, ever rely on one risk metric.
Daily Archives: December 6, 2011
Research Review | 12.6.2011 | Market Timing & Risk Management
A Risk Based Approach to Tactical Asset Allocation
Stefano Colucci and Dario Brandolini (Symphonia Sgr) | November 28, 2011
Faber’s ‘A Quantitative Approach to Tactical Asset Allocation’ (2009) proposes the use of a very simple trading rule to improve the risk-adjusted returns across various asset classes. The purpose of this paper is to present an alternative and simple quantitative risk based portfolio management that improves the risk-adjusted portfolio returns across various asset classes. This approach, based on the conclusions of Brandolini D. – Colucci S. ‘Backtesting Value-at-Risk: A comparison between Filtered Bootstrap and Historical Simulation’, has been tested since 1974 for calibration and since 2000 in a real backtest. The asset allocation framework is using a combination of indices, including the Standard&Poors 500, Topix, Dax, MSCI United Kingdom, MSCI France, Italy Comit Globale, MSCI Canada, MSCI Emerging Markets , RJ/CRB, Merril Lynch U.S. Treasuries, 7-10 Yrs , and all indices are expressed in US Dollar. Since 2000 the empirical results present equity-like returns with lower volatility and drawdown and only one negative year both in gross and net of costs returns.