Regime-based asset allocation via adaptive risk premium

A system for identifying a regime-based asset allocation via an adaptive risk premium (ARP), the system comprising:

• a memory configured to store software instructions;
• a central processing unit (CPU) configured to execute the software instructions;
• a risk regime module configured to execute on the CPU and adapted with functionality to:
• receive a plurality of financial data from a plurality of financial data sources,
• determine, based on an adaptive risk premium, a low risk regime comprising low risk regime returns and a low risk regime covariance matrix of assets,
• determine, based on the adaptive risk premium, a normal risk regime comprising normal risk regime expected returns and a normal risk regime covariance matrix of assets,
• determine, based on the adaptive risk premium, a high risk regime comprising high risk regime expected returns and a high risk regime covariance matrix of assets,
• calculate a plurality of calculated weights for each risk regime of the plurality of risk regimes using a plurality of financial parameters and the plurality of financial data,
• determine, based on the plurality of financial data, a current risk regime of the plurality of risk regimes,
• determine a plurality of asset weights of a current portfolio,
• adjust the plurality of asset weights of the current portfolio to match the plurality of calculated weights of the current risk regime to create a first plurality of adjusted asset weights,
• determine one of a second plurality of adjusted asset weights for the current portfolio, and
• generate, based on the one of the second plurality of adjusted asset weights for the current portfolio, an investment portfolio;
• an ARP model comprising an ARP generator configured to execute on the CPU and adapted with functionality to:
• receive the plurality of financial data from the risk regime module,
• generate the adaptive risk premium using the plurality of financial data, and
• send the adaptive risk premium to the risk regime module;
• a financial parameter calculator configured to execute on the CPU and adapted with functionality to:
• calculate the plurality of financial parameters for each risk regime of the plurality of risk regimes, and
• send the plurality of financial parameters to the risk regime module;
• and
• a momentum, volatility, and correlation (MVC) module comprising a portfolio weight module and configured to execute on the CPU and adapted with functionality to:
• calculate MVC for each asset class of the current portfolio,
• rank each asset class by the MVC,
• adjust, based on ranking each asset class by the MVC and using the portfolio weight module, the first plurality of adjusted asset weights to create the second plurality of adjusted asset weights, and
• send the second plurality of adjusted asset weights to the risk regime module.

A computer readable storage medium comprising computer readable program code embodied therein for performing a method of identifying a regime-based asset allocation via an adaptive risk premium, the method comprising:

• receiving a plurality of financial data associated with a plurality of financial markets;
• receiving a plurality of financial parameters;
• generating, based on the plurality of financial data, an adaptive risk premium using an adaptive risk premium model;
• determining, based on the adaptive risk premium, a low risk regime comprising low risk regime expected returns and a low risk regime covariance matrix of assets;
• determining, based on the adaptive risk premium, a normal risk regime comprising normal risk regime expected returns and a normal risk regime covariance matrix of assets;
• determining, based on the adaptive risk premium, a high risk regime comprising high risk regime expected returns and a high risk regime covariance matrix of assets;
• calculating a plurality of calculated weights for each risk regime using the plurality of financial parameters and the plurality of financial data;
• determining, based on the plurality of financial data and using the CPU, a current risk regime of the plurality of risk regimes;
• determining a plurality of asset weights of a current portfolio comprising a plurality of asset classes;
• adjusting the plurality of asset weights of the current portfolio to match the plurality of calculated weights for the current risk regime to create a first adjusted plurality of asset weights;
• calculating a momentum, volatility, and a correlation (MVC) for each asset class of the plurality of asset classes of the current portfolio;
• ranking each asset class of the current portfolio by the MVC;
• adjusting, based on the MVC, the first plurality of adjusted asset weights of the current portfolio to create a second plurality of adjusted asset weights;
• determining one of the second plurality of adjusted asset weights for the current portfolio;
• and
• generating, based on the one of the second plurality of adjusted asset weights for the current portfolio, an investment portfolio.