Title: Regime switching, asymmetric correlation and international portfolio choices

Authors: Fathi Abid, Slah Bahloul

Addresses: Faculty of Economics and Business, Road of the Airport 4, University of Sfax, Sfax Tunisia 3018, Tunisia. ' Higher School of Business Administration, Road of the Airport 4, University of Sfax, Sfax Tunisia 3018, Tunisia

Abstract: The aim of this paper is to investigate the behaviour of international equity returns and correlations using the discrete-time Markov-switching model and the impact of this behaviour on international portfolio choices. We take the perspective of a US-based global investor who considers investment across the six largest major markets over the period from December 1994 to July 2009. Results show that financial markets are characterised by two regimes: a bull and a bear market. Besides, correlations appear to be very important in a bear state and significantly different from those in the bull market. Finally, optimal portfolio weights vary considerably across regimes and over time as investors revise their estimates of the state probabilities.

Keywords: Andrey Markov; regime switching; asymmetric correlation; portfolio optimisation; portfolio choices; international portfolios; home equities; equity bias; equity returns; discrete-time models; USA; United States; global investors; investments; financial markets; bull markets; bear markets; optimal portfolio weights; probabilities; probability; estimate revision; monetary economics; finance.

DOI: 10.1504/IJMEF.2011.039328

International Journal of Monetary Economics and Finance, 2011 Vol.4 No.2, pp.172 - 194

Published online: 31 Mar 2011 *

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