A Regime-Switching Factor Model for Mean-Variance Optimization PDF Download

Are you looking for read ebook online? Search for your book and save it on your Kindle device, PC, phones or tablets. Download A Regime-Switching Factor Model for Mean-Variance Optimization PDF full book. Access full book title A Regime-Switching Factor Model for Mean-Variance Optimization by Giorgio Costa. Download full books in PDF and EPUB format.

A Regime-Switching Factor Model for Mean-Variance Optimization

A Regime-Switching Factor Model for Mean-Variance Optimization PDF Author: Giorgio Costa
Publisher:
ISBN:
Category :
Languages : en
Pages : 33

Book Description
We formulate a novel Markov regime-switching factor model to describe the cyclical nature of asset returns in modern financial markets. Maintaining a factor model structure allows us to easily derive the asset expected returns and their corresponding covariance matrix. By design, these two parameters are calibrated to better describe the properties of the different market regimes. In turn, these regime-dependent parameters serve as the inputs during mean-variance optimization, thereby constructing portfolios adapted to the current market environment. Through this formulation, the proposed model allows for the construction of large, realistic portfolios at no additional computational cost during optimization. Moreover, the viability of this model can be significantly improved by periodically re-balancing the portfolio, ensuring proper alignment between the estimated parameters and the transient market regimes. An out-of-sample computational experiment over a long investment horizon shows that the proposed regime-dependent portfolios are better aligned with the market environment, yielding a higher ex post rate of return and lower volatility than competing portfolios.