Regime Shifts: Implications for Dynamic Strategies
Windham Capital Management
State Street Associates
State Street Global Markets
May 25, 2012
Financial Analysts Journal, Vol. 68, No. 3, 2012
Regime shifts present significant challenges for investors because they cause performance to depart significantly from the ranges implied by long-term averages of means and covariances. But regime shifts also present opportunities for gain. The authors show how to apply Markov-switching models to forecast regimes in market turbulence, inflation, and economic growth. They found that a dynamic process outperformed static asset allocation in backtests, especially for investors who seek to avoid large losses.
Keywords: Portfolio Management, Portfolio Construction and Revision, Risk Management, Risk Management, Portfolio Risk ManagementAccepted Paper Series
Date posted: May 26, 2012
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