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How Do Regimes Affect Asset Allocation?

Geert Bekaert

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Andrew Ang

BlackRock, Inc

November 2003

NBER Working Paper No. w10080

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.

Number of Pages in PDF File: 28

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Date posted: November 14, 2003  

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

Contact Information

Geert Bekaert
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Andrew Ang (Contact Author)
BlackRock, Inc ( email )
55 East 52nd Street
New York City, NY 10055
United States
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