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Dynamic Portfolio Selection: the Relevance of Switching Regimes and Investment Horizon
Author(s) -
Graflund Andreas,
Nilsson Birger
Publication year - 2003
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/1468-036x.00215
Subject(s) - portfolio , economics , replicating portfolio , stock (firearms) , selection (genetic algorithm) , investment (military) , asset (computer security) , relevance (law) , financial economics , set (abstract data type) , portfolio optimization , merton's portfolio problem , microeconomics , computer science , programming language , mechanical engineering , computer security , artificial intelligence , politics , law , engineering , political science
This paper investigates the questions of dynamic portfolio selection and intertemporal hedging within a Markovian regime‐switching framework. The investment opportunity set is spanned by a well‐diversified home‐market portfolio and the risk‐free asset. Our results highlight the economic importance of regimes, as optimal portfolio weights are clearly dependent on the prevailing regime. We present evidence that the question of intertemporal hedging is a more complex issue than is hinted in the previous literature, since demand for intertemporal hedging is present in some regimes, but not in others. Finally, our main findings are qualitatively unchanged across the four largest stock markets in the world.