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Asia-Pacific Financial Markets

, Volume 18, Issue 2, pp 213–229 | Cite as

Log Mean-Variance Portfolio Selection Under Regime Switching

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Abstract

In this paper we develop a portfolio selection theory considering discrete regime shifts in the investment opportunity and conduct an empirical analysis using Japanese sector indices to verify its effectiveness. Specifically, we model the regime shifts using a first-order Markov switching model and consider a dynamic portfolio selection problem using log mean-variance criteria. The estimation result implies that the model allows us to extract stable regimes when the number of regimes is appropriately chosen. Taking advantage of these regimes, we can improve the performance of the portfolio with rebalancing frequencies kept low.

Keywords

Regime switching model Dynamic portfolio selection Discrete-time Log mean-variance criteria Quadratic programming EM algorithm 

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References

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Copyright information

© Springer Science+Business Media, LLC. 2010

Authors and Affiliations

  1. 1.Graduate School of International AccountingChuo UniversityTokyoJapan
  2. 2.JPMorgan Asset Management (Japan) LtdTokyoJapan

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