Optimal Asset Allocation with Hidden Markov Regime Switching<br/>

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Optimal Asset Allocation with Hidden Markov Regime Switching

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Type of Document: M.Sc. Thesis
Language: Farsi
Document No: 42042 (44)
University: Sharif University of Technology
Department: Management and Economics
Advisor(s): Bahramgiri, Mohsen; Jalali Naeni, Ahmad Reza
Abstract:
Asset allocation is one of the core economic functions of security markets. By purchasing and selling securities individuals are able to effectively time their stream of consumption and to allocate their temporarily unused wealth among competing investments. To time the stream of future consumption optimally, the question arises as to how wealth is allocated most effciently on security markets. The purpose of this thesis is to develop an optimal Asset Allocation with Hidden Markov Regime Switching means and volatilities. We use the historical weekly information of three Indices in Wallstreet stock exchange: Stock, bond and commodity. First we use these historical information from t=1,…,T-1and forcast Expected return vector and expected Covariance Matrix of our indices next week (t=T) by using Hidden Markov Regime Switching method. then we use the outputs of previous step and forcast optimal weights of our portfolio for next week (t=T) by using Mean-Variance method. Finally we use the Britten-Jones Test to improve our Efficient Frontier.
Keywords:
Regime-Switching Model ; Mean-Variance Method ; Asset Allocation ; Asset Classes ; Hidden Markov Regime Switching Model

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