Markov-switching Asset Allocation: Do Profitable Strategies Exist?

Jan Bulla, Sascha Mergner (), Ingo Bulla, André Sesboüé and Christophe Chesneau

MPRA Paper from University Library of Munich, Germany

Abstract: This paper 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 US, Japan, and Germany over the last 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%. Additionally, 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)
JEL-codes: C13 C15 C22 E44 G11 G15 (search for similar items in EconPapers)
Date: 2010-01-07
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Citations: View citations in EconPapers (11)

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