Regime Shifts: Implications for Dynamic Strategies
Posted: 23 May 2012
Date Written: May 22, 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.
Authors' Note: Sebastien Page worked on this article while at State Street Global Markets. He has since joined PIMCO.
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