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Regime-switching poses both problems and opportunities for portfoliomanagers. If a switch in the behaviour of the markets is not quickly detectedit can be a source of loss, since previous trading positions may beinappropriate in the new regime. However, if a regime-switch can be detectedquickly, and especially if it can be predicted ahead of time, these changes inmarket behaviour can instead be a source of substantial profit. The work ofthis paper builds on two previous works by the authors, the first of thesedealing with regime detection and the second, which is an extension of thefirst, with regime prediction. Specifically, this work uses our previousregime-prediction model (KMRF) within a framework of multi-period portfoliooptimisation, achieved by model predictive control, (MPC), with theKMRF-derived return estimates accuracy-boosted by means of a novel use of aKalman filter. The resulting proposed model, which we term the KMRF+MPC model,to reflect its constituent methodologies, is demonstrated to outperformindustry-standard benchmarks, even though it is restricted, in order to beacceptable to the widest range of investors, to long-only positions.

Multi-Period Portfolio Optimisation Using a Regime-Switching Predictive Framework