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A note on optimal portfolios under regime–switching

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  • Haas, Markus

Abstract

This paper extends the stochastic dominance rules for normal mixture distributions derived by Levy and Kaplanski (2015). First, the portfolios under consideration are allowed to follow different regime-switching processes. Second, the results are extended from second- to fourth-order stochastic dominance, which is known to be closely related to kurtosis aversion in financial markets and allows to compare mixture distributions with the same overall variance. In particular, when a risk-free asset is available, checking for fourth-order stochastic dominance turns out to amount to a comparison of the regime-specific and overall Sharpe ratios of the portfolios under consideration.

Suggested Citation

  • Haas, Markus, 2016. "A note on optimal portfolios under regime–switching," Finance Research Letters, Elsevier, vol. 19(C), pages 209-216.
    • Handle: RePEc:eee:finlet:v:19:y:2016:i:c:p:209-216
    DOI: 10.1016/j.frl.2016.08.001
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    Cited by:

    1. Zhipeng, Yan & Shenghong, Li, 2018. "Hedge ratio on Markov regime-switching diagonal Bekk–Garch model," Finance Research Letters, Elsevier, vol. 24(C), pages 49-55.
    2. Shi, Yanlin, 2022. "A closed-form estimator for the Markov switching in mean model," Finance Research Letters, Elsevier, vol. 44(C).

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    More about this item

    Keywords

    Portfolio selection; Regime–switching; Sharpe ratio; Stochastic dominance;
    All these keywords.

    JEL classification:

    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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