28 Pages Posted: 14 Nov 2003
Date Written: November 2003
International equity returns are characterized by episodes of high volatility and unusually high correlations coinciding with bear markets. We develop models of asset returns that match these patterns and use them in asset allocation. First, the presence of regimes with different correlations and expected returns is difficult to exploit within a framework focused on global equities. Nevertheless, for all-equity portfolios, a regime-switching strategy dominates static strategies out-of-sample. Second, substantial value is added when an investor chooses between cash, bonds and equity investments. When a persistent bear market hits, the investor switches primarily to cash. There are large market timing benefits because the bear market regimes tend to coincide with periods of relatively high interest rates.
Suggested Citation: Suggested Citation
Bekaert, Geert and Ang, Andrew, How Do Regimes Affect Asset Allocation? (November 2003). NBER Working Paper No. w10080. Available at SSRN: https://ssrn.com/abstract=467548