publication . Preprint . 2013

Portfolio Optimization: A Combined Regime-Switching and Black–Litterman Model

Edwin O. Fischer; Immanuel Seidl;
Open Access
  • Published: 04 Feb 2013
Abstract
Traditionally portfolios are optimized with the single-regime Markowitz model using the volatility as the risk measure and the historical return as the expected return. This study shows the effects that a regime-switching framework and alternative risk measures (modified value at risk and conditional value at risk) and return measures (CAPM estimates and Black–Litterman estimates) have on the asset allocation and on the absolute and relative performance of portfolios. It demonstrates that the combination of alternative risk and return measures within the regime-switching framework produces significantly better results in terms of performance and the modified Sha...
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