New paper in Journal of Financial Economics for Prof. Collin-Dufresne
© 2019 EPFL
Professor Collin-Dufresne has a new article accepted in the Journal of Financial Economics. The title of this article is "Liquidity Regimes and Optimal Dynamic Asset Allocation" and it is co-authored with Professors Daniel Kent and Saglam Mehmet.
Abstract
We solve a portfolio choice problem when expected returns, volatilities and trading-costs follow a regime-switching model. The optimal policy trades towards an aim portfolio given by a weighted-average of the conditional mean-variance portfolios in all future states. The trading speed is higher in more persistent, riskier and higher-liquidity states. It can be optimal to overweight low Sharpe-ratio assets such as Treasury bonds because they remain liquid even in crisis states. We illustrate our methodology by constructing an optimal US equity market timing portfolio based on an estimated regime-switching model and on trading costs estimated using a large-order institutional trading dataset.