IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Markov-switching Asset Allocation: Do Profitable Strategies Exist?

  • Bulla, Jan
  • Mergner, Sascha
  • Bulla, Ingo
  • Sesboüé, André
  • Chesneau, Christophe

This paper proposes a straightforward Markov-switching asset allocation model, which reduces the market exposure to periods of high volatility. The main purpose of the study is to examine the performance of a regime-based asset allocation strategy under realistic assumptions, compared to a buy and hold strategy. An empirical study, utilizing daily return series of major equity indices in the US, Japan, and Germany over the last 40 years, investigates the performance of the model. In an out-of-sample context, the strategy proves profitable after taking transaction costs into account. For the regional markets under consideration, the volatility reduces on average by 41%. Additionally, annualized excess returns attain 18.5 to 201.6 basis points.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://mpra.ub.uni-muenchen.de/21154/1/MPRA_paper_21154.pdf
File Function: original version
Download Restriction: no

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 21154.

as
in new window

Length:
Date of creation: 07 Jan 2010
Date of revision:
Handle: RePEc:pra:mprapa:21154
Contact details of provider: Postal: Schackstr. 4, D-80539 Munich, Germany
Phone: +49-(0)89-2180-2219
Fax: +49-(0)89-2180-3900
Web page: http://mpra.ub.uni-muenchen.de

More information through EDIRC

References listed on IDEAS
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.:

as in new window
  1. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
  2. Turner, Christopher M. & Startz, Richard & Nelson, Charles R., 1989. "A Markov model of heteroskedasticity, risk, and learning in the stock market," Journal of Financial Economics, Elsevier, vol. 25(1), pages 3-22, November.
  3. Massimo Guidolin & Allan Timmermann, 2005. "Economic Implications of Bull and Bear Regimes in UK Stock and Bond Returns," Economic Journal, Royal Economic Society, vol. 115(500), pages 111-143, 01.
  4. Martin Hess, 2006. "Timing and diversification: A state-dependent asset allocation approach," The European Journal of Finance, Taylor & Francis Journals, vol. 12(3), pages 189-204.
  5. G. William Schwert, 1988. "Why Does Stock Market Volatility Change Over Time?," NBER Working Papers 2798, National Bureau of Economic Research, Inc.
  6. Andreas Graflund & Birger Nilsson, 2003. "Dynamic Portfolio Selection: the Relevance of Switching Regimes and Investment Horizon," European Financial Management, European Financial Management Association, vol. 9(2), pages 179-200.
  7. Tobias Rydén & Timo Teräsvirta & Stefan Åsbrink, 1998. "Stylized facts of daily return series and the hidden Markov model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 13(3), pages 217-244.
  8. Andrew Ang & Geert Bekaert, 2002. "International Asset Allocation With Regime Shifts," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1137-1187.
  9. Manuel Ammann & Michael Verhofen, 2006. "The Effect of Market Regimes on Style Allocation," Financial Markets and Portfolio Management, Springer, vol. 20(3), pages 309-337, September.
  10. Jan Bulla & Andreas Berzel, 2008. "Computational issues in parameter estimation for stationary hidden Markov models," Computational Statistics, Springer, vol. 23(1), pages 1-18, January.
  11. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
  12. Goldfeld, Stephen M. & Quandt, Richard E., 1973. "A Markov model for switching regressions," Journal of Econometrics, Elsevier, vol. 1(1), pages 3-15, March.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:21154. 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: (Ekkehart Schlicht)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.