NDLI: Strategic asset allocation with switching dependence

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Strategic asset allocation with switching dependence

Content Provider	Springer Nature Link
Author	Hainaut, Donatien MacGilchrist, Renaud
Copyright Year	2011
Abstract	This paper revisits the problem of the strategic asset allocation between stocks and bonds. The novelty of our approach is to model the influence of economic cycles on the marginal distributions of asset returns and their dependence structure by a single hidden Markov chain. After a brief review of selected statistical distributions (Student’t and Weibull) and copulas (elliptic and Archimedian), we describe how the switching regime model is calibrated using two indices: the CAC 40 for stocks and the SGI Bond 10 years, for bonds. We then propose a dynamic investment policy based on the estimated probabilities of sojourn in each state of the Markov chain. Even though the Markov chain ruling the assets dynamics is hidden, a Bayesian procedure can be used to infer the probabilities of being in a certain state of the economy. The asset allocation can then be adapted to provide the highest yield given the most likely state. Having calibrated and estimated the parameters of the model, the performance of static and dynamic strategies are compared by conducting Monte Carlo simulations. Our results show that dynamic strategies, which exploit the additional information relating the probable regime state, perform better than static policies with a limited risk and an acceptable number of reallocations.
Starting Page	75
Ending Page	96
Page Count	22
File Format	PDF
ISSN	16142446
Journal	Annals of Finance
Volume Number	8
Issue Number	1
e-ISSN	16142454
Language	English
Publisher	Springer-Verlag
Publisher Date	2011-06-26
Publisher Place	Berlin, Heidelberg
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	Copula Switching regime Quantitative Finance Macroeconomics/Monetary Economics Finance/Investment/Banking
Content Type	Text
Resource Type	Article
Subject	Finance

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