In this paper we examine the performance of the Markov Switching model with intra-regimes changes such as the bull market correction and bear market rallies. We accommodate this short time rehearsals by imposing restrictions on the transition probability matrix. We compare the model with classic mean-switching and dynamic VAR models in an asset allocation problem with different number of regimes, initial states choices and asset distributions used in the estimation process. In an out-of-sample and bootstrap verification we give evidence that the constrained model outperforms other models in terms of risk-adjusted returns in the long horizon above 2 years.

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Diris, B.F.
hdl.handle.net/2105/35065
Econometrie
Erasmus School of Economics

Liszewski, O. (2016, September 6). Asset allocation under multiple regimes Master’s Thesis in Quantitative Finance. Econometrie. Retrieved from http://hdl.handle.net/2105/35065