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Practical Applications

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Practical Applications of Liquidity-Driven Dynamic Asset Allocation

James X. Xiong, Rodney N. Sullivan, Peng Wang and Leslie Kramer
Practical Applications Summer 2013, 1 (1) DOI: https://doi.org/10.3905/pa.2013.1.1.010
James X. Xiong
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Rodney N. Sullivan
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Peng Wang
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Leslie Kramer
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Liquidity-Driven Dynamic Asset Allocation James X. Xiong Rodney N. Sullivan Peng Wang

Abstract

The questions of how much risk to take on, and when, are ones that investment managers are continually negotiating as they chase greater returns. In Liquidity-Driven Dynamic Asset Allocation , which was published in the Spring 2013 issue of The Journal of Portfolio Management , the authors investigate firm-level liquidity risk and aggregate market risk and their relationship to each other. They show how investors can use aggregated market liquidity as a signal to time the overall market.

This Practical Applications report is based on an interview with Co-Author James X. Xiong, Head of Quantitative Research at Morningstar Investment Management . Xiong describes the well-tested methodology the article introduces. He suggests that investors can use the methodology, known as the liquidity measure, to rebalance portfolios to enhance performance—over time, throughout liquidity cycles and between high- and low-liquidity-premium environments.

Xiong’s co-authors are: Rodney N. Sullivan, Head of Publications at the CFA Institute , and Peng Wang, Investment Associate at the University of Virginia Investment Company .

The bottom line: Use liquidity signals to construct asset allocation models.

TOPICS: Portfolio construction, factor-based models, in markets

  • The content is made available for your general information and use and is not intended for trading or other specific investment advice purposes or to address your particular requirements. We do not represent or endorse the accuracy or reliability of any advice, opinion, statement, or other information provided any user of this publication. Reliance upon any opinion, advice, statement, or other information shall also be at your own risk. Independent advice should be obtained before making any such decision. Any arrangements made between you and any third party named in this publication are at your sole risk.
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Practical Applications of Liquidity-Driven Dynamic Asset Allocation
James X. Xiong, Rodney N. Sullivan, Peng Wang
Practical Applications Jul 2013, 1 (1) DOI: 10.3905/pa.2013.1.1.010

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Practical Applications of Liquidity-Driven Dynamic Asset Allocation
James X. Xiong, Rodney N. Sullivan, Peng Wang
Practical Applications Jul 2013, 1 (1) DOI: 10.3905/pa.2013.1.1.010
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