Regime shifts in mean-variance efficient frontiers: some international evidence

Massimo Guidolin and Federica Ria

No 2010-040, Working Papers from Federal Reserve Bank of St. Louis

Abstract: Regime switching models have been assuming an increasingly central role in financial applications because of their well-known ability to capture the presence of rich non-linear patterns in the joint distribution of asset returns. After reviewing key concepts and technical issues related to specifying, estimating, and using multivariate Markov switching models in financial applications, in this paper we examine how the presence of regimes in means, variances, and covariances of asset returns translates into explicit dynamics of the Markowitz mean-variance frontier. In particular, we show both theoretically and through an application to international equity portfolio diversification that substantial differences exist between bull and bear regime-specific frontiers, both in statistical and in economic terms. Using Morgan Stanley Capital International (MSCI) investable indices for five countries/macro-regions, we characterize mean-variance frontiers and optimal portfolio strategies in bull periods, in bear periods, and in periods where high uncertainty exists on the nature of the current regime.

Keywords: Asset pricing; Econometric models; Rate of return; Great Britain (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-ifn
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Citations: View citations in EconPapers (4)

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Journal Article: Regime shifts in mean-variance efficient frontiers: Some international evidence (2011)
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