Dynamic Asset Allocation Strategies Based on Volatility and Turbulence Performance comparison 1973-2014

Abstract

The main purpose of this thesis is to evaluate the performance of the dynamic turbulence targeting asset allocation strategy, and then match it up against the volatility targeting strategy, which is the dynamic benchmark, plus the classic buy-and-hold equally-weighted strategy, which is the static benchmark portfolio. The analysis is conducted across four data sets, all of which are based on U.S. stock indices, using an out-of-sample period from 1973 to 2014, and also sub periods 1973 to 1990 and 1991 up to 2014. Performances are first of all determined and assessed by the use of the Sharpe and Sortino ratios. In addition, the Sharpe ratios of the three strategies are tested, in order to identify whether they truly are statistically significantly distinguishable from one another. The empirical findings of this examination suggest that the turbulence targeting portfolio outperforms the two other portfolios, as stated by the numerical values of the Sharpe and Sortino ratios. Though, we cannot conclude that the Sharpe ratio of the turbulence targeting portfolio is statistically significantly higher than those of the benchmark portfolios. We also document that turbulence and volatility both are negatively related to future excess returns.