Is Regime Switching in Stock Returns Important in Portfolio Decisions?

Jun Tu ()

Management Science, 2010, vol. 56, issue 7, 1198-1215

Abstract: The stock market displays regime switching between upturns and downturns. This paper provides a Bayesian framework for making portfolio decisions that takes this regime switching into account, together with asset pricing model uncertainty and parameter uncertainty. The findings reveal that the economic value of accounting for regimes is substantially independent of whether or not model and parameter uncertainties are incorporated: the certainty-equivalent losses associated with ignoring regime switching are generally above 2% per year and can be as high as 10%. These results suggest that the more realistic regime switching model is fundamentally different from the commonly used single-state model, and hence should be employed instead in portfolio decisions irrespective of concerns about model or parameter uncertainty.

Keywords: investments; regime switching; model uncertainty; parameter uncertainty; Bayesian analysis (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (53)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.1100.1181 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:56:y:2010:i:7:p:1198-1215

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().