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A Tale of Two States: An Application of a Markov Switching Model to Anomaly Returns

In: Eurasian Economic Perspectives

Author

Listed:
  • Adam Zaremba

    (University of Dubai
    Poznan University of Economics and Business)

  • Anna Czapkiewicz

    (Faculty of Management, AGH University of Science and Technology)

  • George D. Kambouris

    (University of Dubai)

Abstract

The time-varying profitability of equity anomalies calls for a useful tool to select the winning investment strategies from the loser investment strategies. We offer a new framework for dynamic asset allocation across the anomalies based on a Markov regime switching model. Using a sample of eleven equity anomalies from the US equity market from the years 1963 to 2016 we demonstrate the predictability of their performance. The anomalies forecasted to be profitable significantly outperform the remaining anomalies by 0.15–0.43% per month. The results are robust to many considerations.

Suggested Citation

  • Adam Zaremba & Anna Czapkiewicz & George D. Kambouris, 2020. "A Tale of Two States: An Application of a Markov Switching Model to Anomaly Returns," Eurasian Studies in Business and Economics, in: Mehmet Huseyin Bilgin & Hakan Danis & Gökhan Karabulut & Giray Gözgor (ed.), Eurasian Economic Perspectives, pages 227-240, Springer.
    • Handle: RePEc:spr:eurchp:978-3-030-35040-6_14
    DOI: 10.1007/978-3-030-35040-6_14
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