PAP-ERS

Project: Sector Rotation Strategy

Objective

Develop a strategy that helps predict economic cycles and implement a sector rotation investment strategy.

Project Overview

This project leverages leading economic indicators to create a model that aids portfolio managers in determining when to be Overweight, Underweight, or Neutral in pro-cyclical assets. The goal is to generate an investment strategy that shifts between pro-cyclical and anti-cyclical sectors based on the economic cycle.

Project Outline

1. Project Definition and Scope:

   • Introduction to the project, including software and terminology.
   • Exploratory Data Analysis (EDA) of economic indicators and their percentage changes.
   • Graphical comparison and analysis of economic indicators versus the S&P 500.

2. Model Proposal:

   • Develop a model for the sector rotation strategy using the given economic indicators.
   • Generate a discretized output (Y) based on the performance of the S&P 500.
   • Download historical data for the benchmark and financial assets.
   • Classify assets based on their pro-cyclical or anti-cyclical nature and their beta.

3. Model Training and Validation:

   • Train and validate the proposed model.
   • Optimize and generalize the parameters of the proposed model.
   • Identify expected trends (Overweight, Underweight, Neutral).
   • Select the investment strategy.

4. Strategy Implementation:

   • Implement the sector rotation investment strategy using the algorithm developed in the previous phase.
   • Perform dynamic backtesting with random asset selection.
   • Analyze the performance metrics of the strategy.
   • Compare the strategy against a benchmark.

5. Final Deliverables:

   • Final corrections and adjustments.
   • Presentation of results in a paper format.
   • Final project presentation.

Setup Instructions

To run this project, you need to set up a virtual environment and install the necessary dependencies.

Step 1: Create a Virtual Environment

python -m venv env

Step 2: Activate the Virtual Environment

• On Windows:

env\Scripts\activate

• On macOS and Linux:

source env/bin/activate

Step 3: Install the Required Packages

pip install -r requirements.txt

You're now ready to run the project! =)