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Practical Applications Summary: Regime-Based versus Static Asset Allocation: Letting the Data Speak

Peter, Nystrup; Bo William, Hansson; Madsen, Henrik and Lindström, Erik LU (2016) In Journal of Portfolio Management 42(1). p.103-109
Abstract
Regime shifts present a big challenge to traditional strategic asset allocation. This article investigates whether regimebased asset allocation can effectively respond to changes in financial regimes at the portfolio level, in an effort to provide better long-term results than more static approaches can offer. The authors center their regime-based approach around a regime-switching model with time-varying parameters that can match financial markets’ tendency to change behavior abruptly and the fact that the new behavior often persists for several periods after a change. In an asset universe consisting of a global stock index and a global government bond index, they show that, even without any level of forecasting skill, holding a static... (More)
Regime shifts present a big challenge to traditional strategic asset allocation. This article investigates whether regimebased asset allocation can effectively respond to changes in financial regimes at the portfolio level, in an effort to provide better long-term results than more static approaches can offer. The authors center their regime-based approach around a regime-switching model with time-varying parameters that can match financial markets’ tendency to change behavior abruptly and the fact that the new behavior often persists for several periods after a change. In an asset universe consisting of a global stock index and a global government bond index, they show that, even without any level of forecasting skill, holding a static portfolio may not be optimal. (Less)
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
Asset Allocation, Regime-Based Investing, Volatility Clustering, Daily Returns, Hidden Markov Model
in
Journal of Portfolio Management
volume
42
issue
1
pages
7 pages
publisher
Institutional Investor Journals Group
ISSN
0095-4918
DOI
10.3905/pa.2016.3.4.152
language
English
LU publication?
yes
id
ec78eede-c592-4b29-8818-7b55881161f1
date added to LUP
2016-06-01 12:03:13
date last changed
2017-02-08 13:39:19
@article{ec78eede-c592-4b29-8818-7b55881161f1,
  abstract     = {Regime shifts present a big challenge to traditional strategic asset allocation. This article investigates whether regimebased asset allocation can effectively respond to changes in financial regimes at the portfolio level, in an effort to provide better long-term results than more static approaches can offer. The authors center their regime-based approach around a regime-switching model with time-varying parameters that can match financial markets’ tendency to change behavior abruptly and the fact that the new behavior often persists for several periods after a change. In an asset universe consisting of a global stock index and a global government bond index, they show that, even without any level of forecasting skill, holding a static portfolio may not be optimal.},
  author       = {Peter, Nystrup and Bo William, Hansson and Madsen, Henrik and Lindström, Erik},
  issn         = {0095-4918},
  keyword      = { Asset Allocation,Regime-Based Investing,Volatility Clustering,Daily Returns,Hidden Markov Model},
  language     = {eng},
  number       = {1},
  pages        = {103--109},
  publisher    = {Institutional Investor Journals Group},
  series       = {Journal of Portfolio Management},
  title        = {Practical Applications Summary: Regime-Based versus Static Asset Allocation: Letting the Data Speak},
  url          = {http://dx.doi.org/10.3905/pa.2016.3.4.152},
  volume       = {42},
  year         = {2016},
}