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Note: This question was written for the weekly topic challenge.

Many of you who deal with asset allocation will probably already be familiar with Mebane Faber's Timing Model, based on one of SSRN's most popular papers of all time, A Quantitative Approach to Tactical Asset Allocation. The crux of his approach is to apply the momentum approach to the decision of when to switch between major asset classes.

What are some of the other major contributions to market timing? What other approaches do they use?

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@ Tal Fishman: basically you are asking for a list of models, and there is no such thing as the 'correct' answer to the question. I guess this implies that the question should be made community wiki, no? –  olaker Jan 3 '12 at 14:03
@olaker I think that is a common misunderstanding of CW. See the SE blog post on this topic. Note "questions rarely, if ever, need community wiki" and "community wiki is for that rare gem of a post that needs true community collaboration." –  Tal Fishman Jan 3 '12 at 14:32
@ Tal Fishman: Traditionally, the 'big list' questions have been made CW. See e.g. questions………. As far as I know, this is also an accepted practice on some other SE sites such as But probably this needs to be clarified with SE administrators/discussed on meta. –  olaker Jan 3 '12 at 15:40
@olaker I know, I just think that in light of the linked blog post, the SE team feels this is an incorrect practice based on a common misunderstanding. Having made these mistakes in the past is no excuse to keep on making these mistakes. –  Tal Fishman Jan 3 '12 at 15:46
Mebane Faber has an extension on his TAA paper. He discusses it here:… –  Quant Guy Mar 8 '12 at 15:59

3 Answers 3

up vote 1 down vote accepted

Not Purely Tactical however some of this should answer your question:

I included the minimum variance portfolio as a "active" (with lots of rebalancing)

Value and Momentum: A tl;dr: long undervalued stocks (book/market) that have strong up momentum, short overvalued stocks (book/market) that have downwards momentum.

130/30 New Long Only: Uses a factor model to estimate expected returns, BARRA risk. You can find implementation of this in R.

Global Minimum Variance Portfolio: tons of papers on this topic a "recent" one, essentially a portfolio constructed to minimize variance (or downside volatility), you need to estimate the covariance matrix, as opposed to having to estimate returns and the covariance matrix.

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I look at the slope of the natural log of the ratio between the asset class and composite, i.e., slope(ln(asset/composite)). Put this into 5 baskets and decide to over weight / under weight accordingly.

As for references there there any many but I can give the following two pointers: - Publication by AI Investors - Symmys (much of it is also in ssrn, but of course this has a broader scope.)

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A comment for the downvote might be helpful. –  Suminda Sirinath Salpitikorala Feb 9 '12 at 7:17
He is looking for references, papers, research. –  SRKX Feb 9 '12 at 9:09

Here's an approach by Kritzman et al on Tactical Asset Allocation using Markov regime switching models. Here's another approach that uses relative strength in TAA.

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