A Probabilistic Macroeconomic Regime Framework for Portfolio Allocation and Risk Management

This paper develops a probabilistic macroeconomic regime framework based on the interaction between economic growth and liquidity conditions, with the objective of improving portfolio risk management across market cycles. The framework identifies four macroeconomic regimes using a rules-based methodology combining labor market indicators, housing activity, credit spreads, yield curve dynamics, and financial conditions. Historical backtests over the period 1972–2025 suggest that the framework achieved higher risk-adjusted returns and substantially lower drawdowns than both the S&P 500 and a traditional 60/40 portfolio. While the framework performs best during endogenous economic downturns and remains subject to the limitations of lagging macroeconomic data and historical relationships, the findings suggest that systematic monitoring of macroeconomic regime transitions can improve long-term asset allocation and downside risk management.

Authors

Publication Details

Journal
Zenodo (CERN European Organization for Nuclear Research)
Published
2026-07-27
DOI
https://doi.org/10.5281/zenodo.21628663
Primary Topic
Credit Risk and Financial Regulations
Type
article
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article

A Probabilistic Macroeconomic Regime Framework for Portfolio Allocation and Risk Management

Václav Kotvalt, Jakub Josef Janík
Zenodo (CERN European Organization for Nuclear Research)
Credit Risk and Financial Regulations
article

A Probabilistic Macroeconomic Regime Framework for Portfolio Allocation and Risk Management

Václav Kotvalt, Jakub Josef Janík
article en

Abstract

This paper develops a probabilistic macroeconomic regime framework based on the interaction between economic growth and liquidity conditions, with the objective of improving portfolio risk management across market cycles. The framework identifies four macroeconomic regimes using a rules-based methodology combining labor market indicators, housing activity, credit spreads, yield curve dynamics, and financial conditions. Historical backtests over the period 1972–2025 suggest that the framework achieved higher risk-adjusted returns and substantially lower drawdowns than both the S&P 500 and a traditional 60/40 portfolio. While the framework performs best during endogenous economic downturns and remains subject to the limitations of lagging macroeconomic data and historical relationships, the findings suggest that systematic monitoring of macroeconomic regime transitions can improve long-term asset allocation and downside risk management.

Zenodo (CERN European Organization for Nuclear Research)
Decent work and economic growth
Openalex Percentile: Top 6%
Credit Risk and Financial Regulations
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