The Effect of Market Regimes on Style Allocation

Ammann, Manuel; Verhofen, Michael

doi:10.1007/s11408-006-0018-2

Cited by 33 publications

(2 citation statements)

References 50 publications

(63 reference statements)

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“…A constant challenge for market participants is detecting property changes in the market and responding accordingly. Ammann explored this very idea and showed how these prolonged market regimes could impact various investing styles differently (Ammann and Verhofen 2006). The coining of the terms bull and bear, for instance, are just one such attempt by people to provide a general classification of these market properties.…”

Section: Introductionmentioning

confidence: 99%

Regime-Switching Factor Investing with Hidden Markov Models

Wang

Lin

Mikhelson

2020

JRFM

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This study uses the hidden Markov model (HMM) to identify different market regimes in the US stock market and proposes an investment strategy that switches factor investment models depending on the current detected regime. We first backtested an array of different factor models over a roughly 10.5 year period from January 2007 to September 2017, then we trained the HMM on S&P 500 ETF historical data to identify market regimes of that period. By analyzing the relationship between factor model returns and different market regimes, we are able to establish the basis of our regime-switching investing model. We then back-tested our model on out-of-sample historical data from September 2017 to April 2020 and found that it both delivers higher absolute returns and performs better than each of the individual factor models according to traditional portfolio benchmarking metrics.

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Section: Introductionmentioning

confidence: 99%

Regime-Switching Factor Investing with Hidden Markov Models

Wang

Lin

Mikhelson

2020

JRFM

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“…Guidolin and Timmermann (2008) propose four-state regimes switching for optimal asset allocation with joint distribution of returns on the market, size (SMB), and book-to-market (HML) portfolios in the U.S. stock market. In addition, Ammann and Verhofen (2006), who estimate a multivariate regime-switching model for the Carhart (1997) four-factor model, show that the outperforming styles vary with regimes identified and discuss style allocation according to the regimes.…”

Section: Introductionmentioning

confidence: 99%

Smart beta Strategy and Long-Short Factor Investing in Style Rotation

Kim¹

2018

KJFS

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According to the literature that an outperforming style changes due to time-varying style premiums, I investigate the dynamic style allocation strategies with Korean stocks under regime switching. I find that value, size, and low volatility are the best styles in the entire sample period. However, low beta and low volatility styles produce superior returns in event regimes, and value and dividend styles outperform in normal regimes. As a result, regimedependent dynamic style allocations outperform the stock market, static equivalent strategies, and all single-style portfolios, both before and after transaction costs. These outperformances are consistent in in-sample and out-of-sample prediction analysis.

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