Asset allocation under regimes in European economies

Sebastien Berujon, Marcelo Lewin and Carlos Heitor Campani

International Journal of Accounting and Finance, 2024, vol. 12, issue 1/2, 47-70

Abstract: The study investigates a dynamic asset allocation strategy in a regime-switching economy. We applied the analytical solution proposed by Campani et al. (2021), i.e., the CGL model, updating its optimisation procedure with a multi-start constrained estimation method. We identified four regimes with a portfolio formed from main European stock market indices. Then, we performed an accuracy assessment, which indicated that the model provided adequate closed-form solutions to maximise the investor's stochastic differential utility. Finally, we analysed the performance of the CGL model for different leverage levels and rebalancing policies, in an out-of-sample exercise. The results demonstrated that the CGL portfolios offer superior return-to-risk ratios than the benchmarks, and outperform their certainty equivalent returns with statistical significance.

Keywords: regime switching models; dynamic asset allocation; portfolio strategies; analytical solutions; European stock market. (search for similar items in EconPapers)
Date: 2024
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