Portfolio Optimization under Time-Varying Economic Regimes
نویسندگان
چکیده
Our paper aims to answer the question: Can the macroeconomic condition be used to better allocate investments among different sectors of a market? Motivated by classical Markowitz portfolio theory, and prior work in attempting to incorporate exogenous economic factors in portfolio optimization [1][2][3][4], we explore three approaches to dynamically rebalance a portfolio as market or economic regimes change continuously over time. Traditionally, portfolio theory assumes that a set of assets can be characterized by a mean return and a covariance matrix, which are stationary over time. Empirically, it has been found [5] that this stationary assumption does not hold; indeed, the behavior of a group of assets is materially dependent on many observable and unobservable economic factors which change over time.
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