Markov-switching asset allocation: Do profitable strategies exist?

Jan Bulla (), Sascha Mergner, Ingo Bulla, André Sesboüé and Christophe Chesneau
Additional contact information
Jan Bulla: Université de Caen, LMNO, Université de Caen

Journal of Asset Management, 2011, vol. 12, issue 5, No 2, 310-321

Abstract: Abstract This article proposes a straightforward Markov-switching asset allocation model, which reduces the market exposure to periods of high volatility. The main purpose of the study is to examine the performance of a regime-based asset allocation strategy under realistic assumptions, compared to a buy-and-hold strategy. An empirical study, utilizing daily return series of major equity indices in the United States, Japan and Germany over the past 40 years, investigates the performance of the model. In an out-of-sample context, the strategy proves profitable after taking transaction costs into account. For the regional markets under consideration, the volatility reduces on average by 41 per cent. In addition, annualized excess returns attain 18.5 to 201.6 basis points.

Keywords: hidden Markov model; Markov-switching model; asset allocation; timing; volatility regimes; daily returns (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

Downloads: (external link)
http://link.springer.com/10.1057/jam.2010.27 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

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:pal:assmgt:v:12:y:2011:i:5:d:10.1057_jam.2010.27

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/41260

DOI: 10.1057/jam.2010.27

Access Statistics for this article

Journal of Asset Management is currently edited by Marielle de Jong and Dan diBartolomeo

More articles in Journal of Asset Management from Palgrave Macmillan
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().