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UBC Theses and Dissertations

Recessions and portfolio choice Wu, Shiming


This thesis studies how investors can allocate assets during recessions. Asset returns and correlations are different during tranquil and crisis regimes, so cyclical asset allocation becomes important to maintaining efficiency. In order to manage investment timing, I propose leading signals demarcating the starts and ends of recessions by predicting regressions. Using these signals, I implement 13 asset-allocation strategies across seven empirical datasets, and evaluate the out-of-sample performance of portfolio choice methods in terms of Sharpe ratio, certainty-equivalent returns, and turnovers. I find that using information from previous recessions can improve the performance of asset allocation. Among the 13 asset-allocation models, models that mitigate the estimation errors of expected returns have better performance during bad times. Furthermore, portfolios with excess returns that have positive market factor loadings have a higher chance to perform better during recessions.

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