Strategic Asset Allocation Under a Fractional Hidden Markov Model

Robert J. Elliott () and Tak Kuen Siu
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Robert J. Elliott: University of Adelaide

Methodology and Computing in Applied Probability, 2014, vol. 16, issue 3, 609-626

Abstract: Abstract Strategic asset allocation is discussed in a discrete-time economy, where the rates of return from asset classes are explained in terms of some observable and hidden factors. We extend the existing models by incorporating long-term memory in the rates of return and observable economic factors, which have been documented in the empirical literature. Hidden factors are described by a discrete-time, finite-state, hidden Markov chain noisily observed in a fractional Gaussian process. The strategic asset allocation problem is discussed in a mean-variance utility framework. Filtering and parameter estimation are also considered in the hybrid model.

Keywords: Strategic asset allocation; Long memory; Hidden Markov models; Fractional Gaussian VAR process; Mean-variance utility; 91B28; 91B70 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1007/s11009-012-9318-3

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