Download or read book Allocation to Industry Portfolios Under Markov Switching Returns written by Deniz Kebabci and published by . This book was released on 2009 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: [This paper proposes a Gibbs Sampling approach to modeling returns on industry portfolios. We examine how parameter uncertainty in the returns process with regime shifts affects the optimal portfolio choice in the long run for a static buy-and-hold investor. We find that after we incorporate parameter uncertainty and take into account the possible regime shifts in the returns process, the allocation to stocks can be smaller in the long run. We find this result to be true for both the NASDAQ portfolio and the individual high tech and manufacturing sector portfolios. Finally, we include dividend yields and the Treasury bill rate as predictor variables in our model with regime switching returns and find that the effect of these predictor variables is minimal: the allocation to stocks is still generally smaller in the long run.
Download or read book Factor and Industry Allocation Using Markov Switching Model written by Saurabh Gokhale and published by . This book was released on 2019 with total page 58 pages. Available in PDF, EPUB and Kindle. Book excerpt: We propose to separate returns and macro-indicators into regimes and use regime-specific mean returns and covariances for better portfolio construction. We fit a multivariate Gaussian mixture process to observable regime indicators along with a Hidden Markov Model for the unobservable state. We then use the fitted regimes and transition matrix to construct different portfolios based on a probability-weighted average of returns and covariances. Our backtesting uses long-short factor returns as well as industry returns. We find the evidence that regime aware optimizations perform better than the popular mean-variance optimization without assumptions of regimes and has higher out-of-sample expected return and lower skewness, kurtosis, and drawdowns.
Download or read book Essays on Portfolio Choice with Bayesian Methods written by Deniz Kebabci and published by . This book was released on 2007 with total page 149 pages. Available in PDF, EPUB and Kindle. Book excerpt: How investors should allocate assets to their portfolios in the presence of predictable components in asset returns is a question of great importance in finance. While early studies took the return generating process as given, recent studies have addressed issues such as parameter estimation and model uncertainty. My dissertation develops Bayesian methods for portfolio choice - and industry allocation in particular - under parameter and model uncertainty. The first chapter of my dissertation, Allocation to Industry Portfolios under Markov Switching Returns, addresses the effect of parameter estimation error on the relation between asset holdings and the investment horizon. This paper assumes that returns follow a regime switching process with unknown parameters. Parameter uncertainty is accounted for through a Gibbs sampling approach. After accounting for parameter estimation error, buy-and-hold investors are generally found to allocate less to stocks the longer the investment horizon. When the dividend yield and T-bill rates are included as predictor variables, the effect of these predictor variables is minimal, and the allocation to stocks is still smaller, the longer the investor's horizon. The second chapter of my dissertation, Portfolio Choice Implications of Parameter and Model Uncertainty in Factor Models, uses industry portfolios to examine the implications of incorporating uncertainty about a range of (conditionally) linear factor models. The paper specifically examines a CAPM, a linear factor model with different predictor variables (dividend yield, price to book ratio, price to earnings ratio, and price to sales ratio) and a time-varying CAPM specification. All approaches incorporate parameter uncertainty in a mean-variance framework. Time-varying CAPM specifications are intuitive in the sense that one cannot expect the environment for each industry to stay constant through time, and so the underlying parameters can be expected to be time-varying as well. Accounting for time- variation in market betas improves the portfolio performance as measured, e.g., by the Sharpe ratio compared to both an unconditional CAPM and a linear factor model with different predictor variables. The paper also looks at the implications for portfolio performance of utilizing a Black-Litterman approach versus a standard mean-variance approach in the asset allocation step. The former can be thought as a model averaging approach and thus can be expected to help dealing with model uncertainty besides the parameter estimation uncertainty. The third chapter of my dissertation, Style Investing with Uncertainty, develops methods to look at style investing. This paper analyzes the determinants that affect style investing, such as style momentum, and predictor variables such as different macro variables (e.g. yield spread, inflation, term structure, industrial production, etc.) and looks at how learning about these variables affects the predictability of returns. Uncertainty in this paper is incorporated using a time-varying parameter model. Returns on style portfolios such as value and size appear to be related to inflation and other macro variables.
Download or read book Credible Asset Allocation Optimal Transport Methods and Related Topics written by Songsak Sriboonchitta and published by Springer Nature. This book was released on 2022-07-29 with total page 762 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book describes state-of-the-art economic ideas and how these ideas can be (and are) used to make economic decision (in particular, to optimally allocate assets) and to gauge the results of different economic decisions (in particular, by using optimal transport methods). Special emphasis is paid to machine learning techniques (including deep learning) and to different aspects of quantum econometrics—when quantum physics and quantum computing models are techniques are applied to study economic phenomena. Applications range from more traditional economic areas to more non-traditional topics such as economic aspects of tourism, cryptocurrencies, telecommunication infrastructure, and pandemic. This book helps student to learn new techniques, practitioners to become better knowledgeable of the state-of-the-art econometric techniques, and researchers to further develop these important research directions
Download or read book Hidden Markov Models for Time Series written by Walter Zucchini and published by CRC Press. This book was released on 2017-12-19 with total page 370 pages. Available in PDF, EPUB and Kindle. Book excerpt: Hidden Markov Models for Time Series: An Introduction Using R, Second Edition illustrates the great flexibility of hidden Markov models (HMMs) as general-purpose models for time series data. The book provides a broad understanding of the models and their uses. After presenting the basic model formulation, the book covers estimation, forecasting, decoding, prediction, model selection, and Bayesian inference for HMMs. Through examples and applications, the authors describe how to extend and generalize the basic model so that it can be applied in a rich variety of situations. The book demonstrates how HMMs can be applied to a wide range of types of time series: continuous-valued, circular, multivariate, binary, bounded and unbounded counts, and categorical observations. It also discusses how to employ the freely available computing environment R to carry out the computations. Features Presents an accessible overview of HMMs Explores a variety of applications in ecology, finance, epidemiology, climatology, and sociology Includes numerous theoretical and programming exercises Provides most of the analysed data sets online New to the second edition A total of five chapters on extensions, including HMMs for longitudinal data, hidden semi-Markov models and models with continuous-valued state process New case studies on animal movement, rainfall occurrence and capture-recapture data
Download or read book Asset Allocation Under Multivariate Regime Switching written by Allan Timmermann and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies asset allocation decisions in the presence of regime switching in asset returns. We find evidence that four separate regimes - characterized as crash, slow growth, bull and recovery states - are required to capture the joint distribution of stock and bond returns. Optimal asset allocations vary considerably across these states and change over time as investors revise their estimates of the state probabilities. In the crash state, buy-and-hold investors allocate more of their portfolio to stocks the longer their investment horizon, while the optimal allocation to stocks declines as a function of the investment horizon in bull markets. The joint effects of learning about state probabilities and predictability of asset returns from the dividend yield give rise to a non-monotonic relationship between the investment horizon and the demand for stocks. Out-of-sample forecasting experiments confirm the economic importance of accounting for the presence of regimes in asset returns.
Download or read book Country and Industry Dynamics in Stock Returns written by Mr.Allan Timmermann and published by International Monetary Fund. This book was released on 2003-03-01 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: A perennial question in international finance is to what extent stock returns are influenced by country-location, as opposed to industry-affiliation, factors. This paper develops a novel methodology to measure these effects, in which portfolios mimicking "pure" country and industry factors are first constructed and their joint dynamics then modeled as regime-switching processes. Estimation using global firm-level data allows us to identify well-defined volatility states over the past thirty years and shows that the contribution of the industry factor becomes systematically more prominent during high global volatility states, while the country factor contribution declines. Using the model's estimates, we find that portfolio diversification possibilities vary considerably across economic states.
Download or read book International Asset Allocation Under Regime Switching Skew and Kurtosis Preferences written by Massimo Guidolin and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates the international asset allocation effects of time-variations in higher-order moments of stock returns such as skewness and kurtosis. In the context of a four-moment International Capital Asset Pricing Model (ICAPM) specification that relates stock returns in five regions to returns on a global market portfolio and allows for time-varying prices of covariance, co-skewness, and co-kurtosis risk, we find evidence of distinct bull and bear regimes. Ignoring such regimes, an unhedged US investor's optimal portfolio is strongly diversified internationally. The presence of regimes in the return distribution leads to a substantial increase in the investor's optimal holdings of US stocks, as does the introduction of skewness and kurtosis preferences.
Download or read book Portfolio and Consumption Decisions Under Ambiguity for Regime Switching Mean Returns written by Hening Liu and published by . This book was released on 2009 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Portfolio Optimization a Combined Regime switching and Black Litterman Model written by Edwin O. Fischer and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book International Asset Allocation Under Regime Switching Skew and Kurtosis Preferences written by Massimo Guidolin and published by . This book was released on 2005 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Tactical Style Allocation written by Stephen E. Satchell and published by . This book was released on 1996 with total page 19 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Handbook of Economic Forecasting written by Graham Elliott and published by Newnes. This book was released on 2013-08-23 with total page 719 pages. Available in PDF, EPUB and Kindle. Book excerpt: The highly prized ability to make financial plans with some certainty about the future comes from the core fields of economics. In recent years the availability of more data, analytical tools of greater precision, and ex post studies of business decisions have increased demand for information about economic forecasting. Volumes 2A and 2B, which follows Nobel laureate Clive Granger's Volume 1 (2006), concentrate on two major subjects. Volume 2A covers innovations in methodologies, specifically macroforecasting and forecasting financial variables. Volume 2B investigates commercial applications, with sections on forecasters' objectives and methodologies. Experts provide surveys of a large range of literature scattered across applied and theoretical statistics journals as well as econometrics and empirical economics journals. The Handbook of Economic Forecasting Volumes 2A and 2B provide a unique compilation of chapters giving a coherent overview of forecasting theory and applications in one place and with up-to-date accounts of all major conceptual issues. Focuses on innovation in economic forecasting via industry applications Presents coherent summaries of subjects in economic forecasting that stretch from methodologies to applications Makes details about economic forecasting accessible to scholars in fields outside economics
Download or read book Smart Beta Portfolios with Markov Regime Switching Models written by Gabriel Barbe and published by . This book was released on 2016 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: While many researchers have studied the performance of style investing strategies such as value, growth or small caps, studies dealing with the performance of smart beta portfolios are limited. This study tests the performance of a dynamic asset allocation strategy based on various smart beta portfolios that rely on a Markov regime-switching model based on macroeconomic regimes. Results and backtests show that using Markov regimes increases the performance of a dynamic smart beta portfolio based on Markov regimes compared to a static benchmark in-sample, and that such performance begins to erode when utilized out-of-sample considering one friction (trade costs). Also, this study finds that the choice of the economic variable used to estimate the Markov regime switching model is important for the performance of smart beta portfolios using Markov regimes based on macroeconomic indicators.
Download or read book Portfolio Management in Practice Volume 2 written by CFA Institute and published by John Wiley & Sons. This book was released on 2020-11-11 with total page 640 pages. Available in PDF, EPUB and Kindle. Book excerpt: Discover the latest essential resource on asset allocation for students and investment professionals. Part of the CFA Institute’s three-volume Portfolio Management in Practice series, Asset Allocation offers a deep, comprehensive treatment of the asset allocation process and the underlying theories and markets that support it. As the second volume in the series, Asset Allocation meets the needs of both graduate-level students focused on finance and industry professionals looking to become more dynamic investors. Filled with the insights and industry knowledge of the CFA Institute’s subject matter experts, Asset Allocation effectively blends theory and practice while helping the reader expand their skillsets in key areas of interest. This volume provides complete coverage on the following topics: Setting capital market expectations to support the asset allocation process Principles and processes in the asset allocation process, including handling ESG-integration and client-specific constraints Allocation beyond the traditional asset classes to include allocation to alternative investments The role of exchange-traded funds can play in implementing investment strategies An integrative case study in portfolio management involving a university endowment To further enhance your understanding of tools and techniques explored in Asset Allocation, don’t forget to pick up the Portfolio Management in Practice, Volume 2: Asset Allocation Workbook. The workbook is the perfect companion resource containing learning outcomes, summary overview sections, and challenging practice questions that align chapter-by-chapter with the main text.
Download or read book Exact Solutions for Expected Rates of Return Under Markov Regime Switching written by Andrew B. Abel and published by . This book was released on 1992 with total page 29 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper derives simple closed-form solutions for expected rates of return on stocks and riskless one-period bills under the assumption that shocks to the growth rates of consumption and dividends are generated by a Markov regime-switching process. These closed-form solutions are used to show that the Markov regime-switching process exacerbates the equity premium puzzle and the risk-free rate puzzle. Three empirical examples illustrate the magnitude of the effects of Markov regime switching on equilibrium expected returns.
Download or read book Strategic Asset Allocation and Markov Regime Switch with GARCH Model written by Ph.D. Simi (Wei) and published by . This book was released on 2013 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: During the financial crisis of 2008, the S&P 500 Implied Volatility Index (VIX), known as the “fear gauge”, jumped to 80% of the highest level it has ever reached. Portfolio managers faced tremendous pressures in these environments of such high levels market volatility. Because it is well known that asset allocation dominates portfolio performances, this paper focuses on asset allocation strategies. It develops a strategic asset allocation solution for portfolio management under all conditions and at all levels of market volatility. The approach is to derive a dynamic optimal portfolio that is based on the well-known asset allocation Black-Litterman [1991, 1992] framework. In addition, this paper proposes a methodology that considers the features of volatility regime-switching over time. This new strategic framework allows portfolio managers to derive a systematically optimal portfolio in a timely, accurate fashion.
