How Do Regimes Affect Asset Allocation?

28 Pages Posted: 14 Nov 2003 Last revised: 19 Jul 2010

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: November 2003

Abstract

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

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

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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