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Regime switching, asymmetric correlation and international portfolio choices

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  • Fathi Abid
  • Slah Bahloul

Abstract

The aim of this paper is to investigate the behaviour of international equity returns and correlations using the discrete-time Markov-switching model and the impact of this behaviour on international portfolio choices. We take the perspective of a US-based global investor who considers investment across the six largest major markets over the period from December 1994 to July 2009. Results show that financial markets are characterised by two regimes: a bull and a bear market. Besides, correlations appear to be very important in a bear state and significantly different from those in the bull market. Finally, optimal portfolio weights vary considerably across regimes and over time as investors revise their estimates of the state probabilities.

Suggested Citation

  • Fathi Abid & Slah Bahloul, 2011. "Regime switching, asymmetric correlation and international portfolio choices," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 4(2), pages 172-194.
    • Handle: RePEc:ids:ijmefi:v:4:y:2011:i:2:p:172-194
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    Cited by:

    1. Slah Bahloul & Fathi Abid, 2012. "Regime-Switching Behavior in the Conditional Volatility of MENA Stock Market Returns," Working Papers 683, Economic Research Forum, revised 2012.
    2. Linyu Cao & Ruili Sun & Tiefeng Ma & Conan Liu, 2023. "On Asymmetric Correlations and Their Applications in Financial Markets," JRFM, MDPI, vol. 16(3), pages 1-18, March.

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