Portfolio selection under changing market conditions
In 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.
Volume (Year): 4 (2009)
Issue (Month): 1 ()
|Contact details of provider:|| Web page: http://www.inderscience.com/browse/index.php?journalID=76|
When requesting a correction, please mention this item's handle: RePEc:ids:ijfsmg:v:4:y:2009:i:1:p:48-63. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Graham Langley)
If references are entirely missing, you can add them using this form.