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Size and Value Anomalies under Regime Shifts

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Author Info
Massimo Guidolin
Allan Timmermann

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Abstract

This paper finds strong evidence of time-variations in the joint distribution of returns on a stock market portfolio and portfolios tracking size- and value effects. Mean returns, volatilities and correlations between these equity portfolios are found to be driven by underlying regimes that introduce short-run market timing opportunities for investors. The magnitude of the premia on the size and value portfolios and their hedging properties are found to vary across regimes. Regimes are shown to have a large impact both on the optimal asset allocation--especially under rebalancing--and on investors' utility. Regimes also have a considerable impact on hedging demands, which are positive when the investor starts from more favorable regimes and negative when starting from bad states. Recursive out-of-sample forecasting experiments show that portfolio strategies based on models that account for regimes dominate single-state benchmarks. Copyright The Author 2007. Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/jjfinec/nbm021
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Publisher Info
Article provided by Oxford University Press in its journal Journal of Financial Econometrics.

Volume (Year): 6 (2008)
Issue (Month): 1 (Winter)
Pages: 1-48
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Handle: RePEc:oup:jfinec:v:6:y:2008:i:1:p:1-48

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Massimo Guidolin & Allan Timmerman, 2006. "Asset allocation under multivariate regime switching," Working Papers 2005-002, Federal Reserve Bank of St. Louis. [Downloadable!]
    Other versions:
  2. Massimo Guidolin & Giovanna Nicodano, 2007. "Managing international portfolios with small capitalization stocks," Working Papers 2007-030, Federal Reserve Bank of St. Louis. [Downloadable!]
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