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

Massimo Guidolin and Federica Ria

Journal of Asset Management, 2011, vol. 12, issue 5, No 3, 322-349

Abstract: Abstract This article examines how the presence of regimes in means, variances and correlations of asset returns translates into explicit dynamics of the Markowitz mean-variance frontier (MVF). In particular, the article shows 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 investable indices for five countries/macro-regions, it is possible to characterize the MVFs and optimal portfolio strategies in bull periods, in bear periods and in periods in which high uncertainty exists on the nature of the current regime. A recursive back-testing exercise shows that between 1998 and 2010, adopting a switching mean-variance strategy may have yielded considerable risk-adjusted pay-offs, which were the largest in correspondence to the 2007–2009 financial crisis.

Keywords: multivariate Markov switching; mean-variance optimization; asset allocation; international portfolio diversification (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:pal:assmgt:v:12:y:2011:i:5:d:10.1057_jam.2011.27

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DOI: 10.1057/jam.2011.27

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