Portfolio selection under changing market conditions
AbstractIn this paper, an extensive portfolio optimisation case study is conducted. For this, in a first step, a Markov-Switching model is estimated to time series of three global stock indices. The estimation includes a new methodology for the search for realistic initial values and a large number of covariates that were tested for their ability to explain transition probabilities. In the second step, the model is used in an industry-standard portfolio optimisation environment and compared under realistic assumptions to a Black-Scholes model. The results indicate that risk measures are significantly reduced and performance measures improved when a Markov-Switching model is used. These improvements are especially due to the faster reallocations in turbulent market phases like the burst of the dot-com bubble or the current financial crisis.
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Bibliographic InfoArticle provided by Inderscience Enterprises Ltd in its journal Int. J. of Financial Services Management.
Volume (Year): 4 (2009)
Issue (Month): 1 ()
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Web page: http://www.inderscience.com/browse/index.php?journalID=76
Markov switching; portfolio selection; financial crisis; market conditions; portfolio optimisation; performance measures; risk management; turbulent markets.;
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- Johannes Hauptmann & Anja Hoppenkamps & Aleksey Min & Franz Ramsauer & Rudi Zagst, 2014. "Forecasting market turbulence using regime-switching models," Financial Markets and Portfolio Management, Springer, vol. 28(2), pages 139-164, May.
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