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Asset Allocation with Recursive Parameter Updating and Macroeconomic Regime Identifiers

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6
Author
Milad Goodarzi Christoph Meinerding
Category
Financial
Date Posted
2023/03/17
Date Retrieved
2023/03/17
Date Revised
Date Written
Description
This article studies long-horizon dynamic asset allocation strategies with recursive parameter updating. The parameter estimates for the regime-switching dynamics vary as more and more datapoints are observed and the sample size increases. In such a setting the globally optimal portfolio strategy cannot be determined due to computational complexity. Among a set of suboptimal strategies the portfolio performance can be improved substantially if the dynamics of the regimes are estimated from fundamental macroeconomic instead of financial return data. Especially after highly uncertain times the estimation based on financial market data identifies extreme regimes leading to extreme hedging demands against regime changes.
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JEL Classifications
G11 D83 E44
Keywords
Regime switching models asset allocation macro-based portfolio strategies parameter updating
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40
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