IDEAS home Printed from https://ideas.repec.org/p/hhs/lunewp/2002_008.html
   My bibliography  Save this paper

Dynamic Portfolio Selection: The Relevance of Switching Regimes and Investment Horizon

Author

Listed:
  • Graflund, Andreas

    (Department of Economics, Lund University)

  • Nilsson, Birger

    (Department of Economics, Lund University)

Abstract

This paper investigates the questions of dynamic portfolio selection and intertemporal hedging within a Markovian regime-switching framework. The investment opportunity set is spanned by a well-diversified home-market portfolio and the risk-free asset. Our results highlight the economic importance of regimes, as optimal portfolio weights are clearly dependent on the prevailing regime. We present evidence that the question of intertemporal hedging is a more complex issue than is hinted in the previous literature, since demand for intertemporal hedging is present in some regimes, but not in others. Finally, our findings are qualitatively unchanged across the four largest stock markets in the in the world, the US, Japan, the UK and Germany.

Suggested Citation

  • Graflund, Andreas & Nilsson, Birger, 2002. "Dynamic Portfolio Selection: The Relevance of Switching Regimes and Investment Horizon," Working Papers 2002:8, Lund University, Department of Economics.
    • Handle: RePEc:hhs:lunewp:2002_008
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-396, March.
    2. Michael W. Brandt, 1999. "Estimating Portfolio and Consumption Choice: A Conditional Euler Equations Approach," Journal of Finance, American Finance Association, vol. 54(5), pages 1609-1645, October.
    3. Tobias Rydén & Timo Teräsvirta & Stefan Åsbrink, 1998. "Stylized facts of daily return series and the hidden Markov model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 13(3), pages 217-244.
    4. Brennan, Michael J. & Schwartz, Eduardo S. & Lagnado, Ronald, 1997. "Strategic asset allocation," Journal of Economic Dynamics and Control, Elsevier, vol. 21(8-9), pages 1377-1403, June.
    5. Andrew Ang & Geert Bekaert, 1999. "International Asset Allocation with Time-Varying Correlations," NBER Working Papers 7056, National Bureau of Economic Research, Inc.
    6. Goffe, William L. & Ferrier, Gary D. & Rogers, John, 1994. "Global optimization of statistical functions with simulated annealing," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 65-99.
    7. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
    8. John Y. Campbell & Luis M. Viceira, 1999. "Consumption and Portfolio Decisions when Expected Returns are Time Varying," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(2), pages 433-495.
    9. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-887, September.
    10. Paul A. Samuelson, 2011. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," World Scientific Book Chapters, in: Leonard C MacLean & Edward O Thorp & William T Ziemba (ed.), THE KELLY CAPITAL GROWTH INVESTMENT CRITERION THEORY and PRACTICE, chapter 31, pages 465-472, World Scientific Publishing Co. Pte. Ltd..
    11. Goldfeld, Stephen M. & Quandt, Richard E., 1973. "A Markov model for switching regressions," Journal of Econometrics, Elsevier, vol. 1(1), pages 3-15, March.
    12. Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, number 9780198296942.
    13. Kim, Chang-Jin, 1994. "Dynamic linear models with Markov-switching," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 1-22.
    14. Kim, Tong Suk & Omberg, Edward, 1996. "Dynamic Nonmyopic Portfolio Behavior," The Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 141-161.
    15. Nicholas Barberis, 2000. "Investing for the Long Run when Returns Are Predictable," Journal of Finance, American Finance Association, vol. 55(1), pages 225-264, February.
    16. Chang-Jin Kim & Charles R. Nelson, 1999. "State-Space Models with Regime Switching: Classical and Gibbs-Sampling Approaches with Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262112388, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kole, H.J.W.G. & Koedijk, C.G. & Verbeek, M.J.C.M., 2004. "The effects of systemic crises when investors can be crisis ignorant," ERIM Report Series Research in Management ERS-2004-027-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    2. Kung, James J., 2009. "A two-asset stochastic model for long-term portfolio selection," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 79(10), pages 3089-3098.
    3. Anna Battauz & Alessandro Sbuelz, 2018. "Non†myopic portfolio choice with unpredictable returns: The jump†to†default case," European Financial Management, European Financial Management Association, vol. 24(2), pages 192-208, March.
    4. John Powell & Rubén Roa & Jing Shi & Viliphonh Xayavong, 2007. "A Test for Long-Term Cyclical Clustering of Stock Market Regimes," Australian Journal of Management, Australian School of Business, vol. 32(2), pages 205-221, December.
    5. Campani, Carlos Heitor & Garcia, René & Lewin, Marcelo, 2021. "Optimal portfolio strategies in the presence of regimes in asset returns," Journal of Banking & Finance, Elsevier, vol. 123(C).
    6. Levy, Moshe & Kaplanski, Guy, 2015. "Portfolio selection in a two-regime world," European Journal of Operational Research, Elsevier, vol. 242(2), pages 514-524.
    7. Buckley, Ian & Saunders, David & Seco, Luis, 2008. "Portfolio optimization when asset returns have the Gaussian mixture distribution," European Journal of Operational Research, Elsevier, vol. 185(3), pages 1434-1461, March.
    8. Fischer, Andreas M. & Greminger, Rafael P. & Grisse, Christian & Kaufmann, Sylvia, 2021. "Portfolio rebalancing in times of stress," Journal of International Money and Finance, Elsevier, vol. 113(C).
    9. Xie, Shuxiang, 2009. "Continuous-time mean-variance portfolio selection with liability and regime switching," Insurance: Mathematics and Economics, Elsevier, vol. 45(1), pages 148-155, August.
    10. Jan Bulla & Sascha Mergner & Ingo Bulla & André Sesboüé & Christophe Chesneau, 2011. "Markov-switching asset allocation: Do profitable strategies exist?," Journal of Asset Management, Palgrave Macmillan, vol. 12(5), pages 310-321, November.
    11. Marcelo Lewin & Carlos Heitor Campani, 2023. "Constrained portfolio strategies in a regime-switching economy," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 37(1), pages 27-59, March.
    12. Daniel Giamouridis & Athanasios Sakkas & Nikolaos Tessaromatis, 2017. "Dynamic Asset Allocation with Liabilities," European Financial Management, European Financial Management Association, vol. 23(2), pages 254-291, March.
    13. Bulla, Jan & Mergner, Sascha & Bulla, Ingo & Sesboüé, André & Chesneau, Christophe, 2010. "Markov-switching Asset Allocation: Do Profitable Strategies Exist?," MPRA Paper 21154, University Library of Munich, Germany.
    14. David McCarthy & David Miles, 2013. "Optimal Portfolio Allocation for Corporate Pension Funds," European Financial Management, European Financial Management Association, vol. 19(3), pages 599-629, June.
    15. Hendriks, Johannes Jurgens & Bonga-Bonga, Lumengo, 2020. "Sectoral dependence and contagion in the BRICS grouping: an application of the R-Vine copulas," MPRA Paper 102473, University Library of Munich, Germany.
    16. Manuel Ammann & Michael Verhofen, 2006. "The Effect of Market Regimes on Style Allocation," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 20(3), pages 309-337, September.
    17. Douglas Cumming & Lars Helge Haß & Denis Schweizer, 2014. "Strategic Asset Allocation and the Role of Alternative Investments," European Financial Management, European Financial Management Association, vol. 20(3), pages 521-547, June.
    18. Kole, Erik & Koedijk, Kees & Verbeek, Marno, 2006. "Portfolio implications of systemic crises," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2347-2369, August.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. George Chacko & Luis M. Viceira, 2005. "Dynamic Consumption and Portfolio Choice with Stochastic Volatility in Incomplete Markets," The Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1369-1402.
    2. Guidolin, Massimo & Timmermann, Allan, 2007. "Asset allocation under multivariate regime switching," Journal of Economic Dynamics and Control, Elsevier, vol. 31(11), pages 3503-3544, November.
    3. Jakub W. Jurek & Luis M. Viceira, 2011. "Optimal Value and Growth Tilts in Long-Horizon Portfolios," Review of Finance, European Finance Association, vol. 15(1), pages 29-74.
    4. Laborda, Ricardo & Olmo, Jose, 2017. "Optimal asset allocation for strategic investors," International Journal of Forecasting, Elsevier, vol. 33(4), pages 970-987.
    5. Ang, Andrew & Bekaert, Geert & Liu, Jun, 2005. "Why stocks may disappoint," Journal of Financial Economics, Elsevier, vol. 76(3), pages 471-508, June.
    6. Daniel Giamouridis & Athanasios Sakkas & Nikolaos Tessaromatis, 2017. "Dynamic Asset Allocation with Liabilities," European Financial Management, European Financial Management Association, vol. 23(2), pages 254-291, March.
    7. Klos, Alexander & Langer, Thomas & Weber, Martin, 2002. "Über kurz oder lang : welche Rolle spielt der Anlagehorizont bei Investitionsentscheidungen?," Papers 02-49, Sonderforschungsbreich 504.
    8. Michael W. Brandt & Amit Goyal & Pedro Santa-Clara & Jonathan R. Stroud, 2005. "A Simulation Approach to Dynamic Portfolio Choice with an Application to Learning About Return Predictability," The Review of Financial Studies, Society for Financial Studies, vol. 18(3), pages 831-873.
    9. Penaranda, Francisco, 2007. "Portfolio choice beyond the traditional approach," LSE Research Online Documents on Economics 24481, London School of Economics and Political Science, LSE Library.
    10. Massimo Guidolin & Allan Timmermann, 2008. "Size and Value Anomalies under Regime Shifts," Journal of Financial Econometrics, Oxford University Press, vol. 6(1), pages 1-48, Winter.
    11. Jessica A. Wachter, 2010. "Asset Allocation," Annual Review of Financial Economics, Annual Reviews, vol. 2(1), pages 175-206, December.
    12. Lynch, Anthony W., 2001. "Portfolio choice and equity characteristics: characterizing the hedging demands induced by return predictability," Journal of Financial Economics, Elsevier, vol. 62(1), pages 67-130, October.
    13. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Journal of Finance, American Finance Association, vol. 55(4), pages 1515-1567, August.
    14. Martin B. Haugh & Leonid Kogan & Jiang Wang, 2006. "Evaluating Portfolio Policies: A Duality Approach," Operations Research, INFORMS, vol. 54(3), pages 405-418, June.
    15. Kaminski, Kathryn M. & Lo, Andrew W., 2014. "When do stop-loss rules stop losses?," Journal of Financial Markets, Elsevier, vol. 18(C), pages 234-254.
    16. John Y. Campbell & Yeung Lewis Chanb & M. Viceira, 2013. "A multivariate model of strategic asset allocation," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part II, chapter 39, pages 809-848, World Scientific Publishing Co. Pte. Ltd..
    17. LuisM. Viceira & John Y. Campbell, 2001. "Who Should Buy Long-Term Bonds?," American Economic Review, American Economic Association, vol. 91(1), pages 99-127, March.
    18. Maenhout, Pascal J., 2006. "Robust portfolio rules and detection-error probabilities for a mean-reverting risk premium," Journal of Economic Theory, Elsevier, vol. 128(1), pages 136-163, May.
    19. Mark E. Wohar & David E. Rapach, 2005. "Return Predictability and the Implied Intertemporal Hedging Demands for Stocks and Bonds: International Evidence," Computing in Economics and Finance 2005 329, Society for Computational Economics.
    20. Nilsson, Birger, 2002. "Financial Liberalization and the Changing Characteristics of Nordic Stock Returns," Working Papers 2002:4, Lund University, Department of Economics.

    More about this item

    Keywords

    intertemporal hedging; dynamic portfolio selection; regime switching;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hhs:lunewp:2002_008. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Iker Arregui Alegria (email available below). General contact details of provider: https://edirc.repec.org/data/delunse.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.