How do Regimes Affect Asset Allocation?
نویسندگان
چکیده
Everyone who has studied international equity returns has noticed the episodes of high volatility and unusually high correlations coinciding with a bear market. We develop quantitative models of asset returns that match these patterns in the data and use them in two quantitative asset allocation analyses. First, we show that the presence of regimes with different correlations and expected returns is difficult to exploit with within a global asset allocation framework focussed on equities. The benefits of international diversification dominate the costs of ignoring the regimes. Nevertheless, for all-equity portfolios, a regime-switching strategy out-performs static strategies out-of-sample. Second, we show that substantial value can be added when the investor chooses between cash, bonds and equity investments. When a persistent bear market hits, the investor switches primarily to cash. This desire for market timing is enhanced because the bear market regimes tend to coincide with periods of relatively high interest rates.
منابع مشابه
The Changing Mosaic of Investment Patterns
TIAA-CREF Institute is a part of TIAA-CREF and the views expressed herein are those of the author(s) and not necessarily those of TIAA-CREF. In the context of the late 1990s stock market bubble and its aftermath, Peter Bernstein and others have suggested that volatile short-term trends and the availability of a wider range of asset classes may call for a more fluid asset allocation strategy tha...
متن کاملO ct 2 00 5 How fast is the bandit ? ∗ Damien Lamberton †
In this paper we investigate the rate of convergence of the so-called two-armed bandit algorithm in a financial context of asset allocation. The behaviour of the algorithm turns out to be highly non-standard: no CLT whatever the time scale, possible existence of two rate regimes.
متن کاملHow do Sudden Stops of Capital Flows Affect Currency Crises in Asia?
Sudden stops can be characterized by sharp reversals in capital inflows, large declines in output, and steep collapses in real asset prices (Mendoza and Smith, 2009). In almost all recent crises, capital account reversals amounting to more than 10% of an afflicted country’s GDP have occurred (Calvo and Reinhart, 1999 and Nabli, 1999). More specifically, reversals in capital flows to emergin...
متن کاملAsset Allocation under Multivariate Regime Switching
This paper studies asset allocation decisions in the presence of regime switching in asset returns. We find evidence that four separate regimes characterized as crash, slow growth, bull and recovery states are required to capture the joint distribution of stock and bond returns. Optimal asset allocations vary considerably across these states and change over time as investors revise their estima...
متن کاملStrategic Asset Allocation and Consumption Decisions under Multivariate Regime Switching∗
This paper studies strategic asset allocation and consumption choice in the presence of regime switching in asset returns. We find evidence that four separate regimes characterized as crash, slow growth, bull and recovery states are required to capture the joint distribution of stock and bond returns. Optimal asset allocations vary considerably across these states both among bonds and stocks an...
متن کامل