Dynamic Portfolio Selection: The Relevance of Switching Regimes and Investment Horizon

26 Pages Posted: 28 May 2002

See all articles by Andreas Graflund

Andreas Graflund

Lund University - Department of Economics

Birger Nilsson

Lund University - Department of Economics

Abstract

This paper investigates the questions of dynamic portfolio selection and intertemporal hedging within a Markovian regime-switching framework. The investment opportunity set is spanned by a well-diversified home-market portfolio and the risk-free asset. Our results highlight the economic importance of regimes, as optimal portfolio weights are clearly dependent on the prevailing regime. We present evidence that the question of intertemporal hedging is a more complex issue than is hinted in the previous literature, since demand for intertemporal hedging is present in some regimes, but not in others. Finally, our findings are qualitatively unchanged across the four largest stock markets in the in the world, the US, Japan, the UK and Germany.

Keywords: intertemporal hedging, dynamic portfolio selection, regime switching

JEL Classification: G11, G15, C15, C32

Suggested Citation

Graflund, Andreas and Nilsson, Birger, Dynamic Portfolio Selection: The Relevance of Switching Regimes and Investment Horizon. Available at SSRN: https://ssrn.com/abstract=313927 or http://dx.doi.org/10.2139/ssrn.313927

Andreas Graflund (Contact Author)

Lund University - Department of Economics ( email )

P.O. Box 7082
S-220 07 Lund
Sweden
+46 (0) 46 222 79 19 (Phone)
+46 (0) 46 222 41 18 (Fax)

Birger Nilsson

Lund University - Department of Economics ( email )

P.O. Box 7082
S-220 07 Lund
Sweden

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