How do Regimes Affect Asset Allocation? / Andrew Ang, Geert Bekaert.

Format:

Book

Author/Creator:

Ang, Andrew.

Contributor:

National Bureau of Economic Research.

Bekaert, Geert.

Series:

Working Paper Series (National Bureau of Economic Research) no. w10080.

NBER working paper series no. w10080

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2003.

Summary:

International equity returns are characterized by episodes of high volatility and unusually high correlations coinciding with bear markets. We develop models of asset returns that match these patterns and use them in asset allocation. First, the presence of regimes with different correlations and expected returns is difficult to exploit within a framework focused on global equities. Nevertheless, for all-equity portfolios, a regime-switching strategy dominates static strategies out-of-sample. Second, substantial value is added when an investor chooses between cash, bonds and equity investments. When a persistent bear market hits, the investor switches primarily to cash. There are large market timing benefits because the bear market regimes tend to coincide with periods of relatively high interest rates.

Notes:

Print version record

November 2003.