Abstract
In this paper we develop a portfolio selection theory under regime switching means and volatilities. We use log mean-variance as the portfolio selection criteria and, as a result, the theory is made substantially easier to implement than other existing theories. Moreover, the estimated regimes are easy to interpret as one of the regimes corresponds to the business cycle turning points. Finally, we conduct an asset allocation simulation and obtain reasonable results by introducing an idea of switching volatility targets.
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Authors are grateful to R.J. Elliott and two referees for many suggestions and comments for improving the earlier draft.
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Ishijima, H., Uchida, M. The Regime Switching Portfolios. Asia-Pac Financ Markets 18, 167–189 (2011). https://doi.org/10.1007/s10690-010-9129-x
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DOI: https://doi.org/10.1007/s10690-010-9129-x