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Has anyone translated Wouter and Butler's new Elastic Asset Allocation model into python script?
Stephen Harlin, MD
posted

Here's the link to their recent paper:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2543979

Here's the Abstract:

A Century of Generalized Momentum; From Flexible Asset Allocations (FAA) to Elastic Asset Allocation (EAA)

Wouter J. Keller, Flex Capital BV ; VU University Amsterdam

Adam Butler, BPG and Associates

This paper follows Keller (2012), which introduced the Flexible Asset Allocation (FAA) concept. FAA is based on a weighted ranking score of historical asset returns (R), volatilities (V), and correlations to an equal weighted index (C). We call this “generalized momentum” since we assume persistence in the short-term, not only for R, but also for V and C. Portfolios were formed monthly from a specified quantile of assets with the highest combined score.

In this paper we generalize FAA, starting from a tactical version of Modern Portfolio Theory (MPT) proposed in Keller (2013). Instead of choosing assets in the portfolio by a weighted ordinal rank on R, V, and C as in FAA, our new methodology – called Elastic Asset Allocation (EAA) – uses a geometrical weighted average of the historical returns, volatilities and correlations, using elasticities as weights.

In order to avoid datasnooping (or curvefitting), we optimize the EAA model exclusively during a 50-year in-sample period (IS) from 1914 and apply these optimal IS parameters to test the model during an out-of-sample (OS) period from 1964-2014. The EAA model demonstrates impressive risk-adjusted and absolute OS performance over an equal weighted index for a variety of global asset universes.

3 responses
Matt Clark

There is a version in R at https://quantstrattrader.wordpress.com/2015/01/16/an-update-on-eaa-and-a-volatility-strategy/ which should be easy to port to Python

Stephen Harlin, MD

Thanks Matt. Ilya Kipnis contributes to this forum, along with CSSAnalytics. His work is impeccable. I wish I had sufficient skills to make the translation and share it with you guys ...but I don't yet. Appreciate the reference though. If, indeed, it is "easy," perhaps someone could give a shot. The EAA portfolio strategy appears robust in Wouter and Butler's paper. I really think you folks would benefit.

Ilya Kipnis

Heh. Thanks for the advertising ^_^"

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