How Do Regimes Affect Asset Allocation?

35 Pages Posted: 27 May 2002

See all articles by Geert Bekaert

Geert Bekaert

Columbia Business School - Finance and Economics

Andrew Ang

BlackRock, Inc

Multiple version iconThere are 2 versions of this paper

Date Written: April 30, 2002


Everyone who has studied international equity returns has noticed the episodes of high volatility and unusually high correlations coinciding with a bear market. We develop quantitative models of asset returns that match these patterns in the data and use them in two quantitative asset allocation analyses. First, we show that the presence of regimes with different correlations and expected returns is difficult to exploit with within a global asset allocation framework focussed on equities. The benefits of international diversification dominate the costs of ignoring the regimes. Nevertheless, for all-equity portfolios, a regime-switching strategy out-performs static strategies out-of-sample. Second, we show that substantial value can be added when the investor chooses between cash, bonds and equity investments. When a persistent bear market hits, the investor switches primarily to cash. This desire for market timing is enhanced because the bear market regimes tend to coincide with periods of relatively high interest rates.

Keywords: market timing, tactical asset allocation, regime switching, international diversification

JEL Classification: F30, G11, G12

Suggested Citation

Bekaert, Geert and Ang, Andrew, How Do Regimes Affect Asset Allocation? (April 30, 2002). Available at SSRN: or

Geert Bekaert

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Andrew Ang (Contact Author)

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

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