Artikel
Regime-switching factor investing with hidden Markov models
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.
- Language
-
Englisch
- Bibliographic citation
-
Journal: Journal of Risk and Financial Management ; ISSN: 1911-8074 ; Volume: 13 ; Year: 2020 ; Issue: 12 ; Pages: 1-15 ; Basel: MDPI
- Classification
-
Wirtschaft
- Subject
-
factor models
hidden Markov model
market regime
- Event
-
Geistige Schöpfung
- (who)
-
Wang, Matthew
Lin, Yi-Hong
Mikhelson, Ilya
- Event
-
Veröffentlichung
- (who)
-
MDPI
- (where)
-
Basel
- (when)
-
2020
- DOI
-
doi:10.3390/jrfm13120311
- Handle
- Last update
-
10.03.2025, 11:42 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Artikel
Associated
- Wang, Matthew
- Lin, Yi-Hong
- Mikhelson, Ilya
- MDPI
Time of origin
- 2020
Other Objects (12)
Growth, Savings, Financial Markets and Markov Switching Regimes
Markov switching regimes in a monetary exchange rate model
Causality and Regime Inference in a Markov Switching VAR
Time Varying Transition Probabilities for Markov Regime Switching Models
Sudden stop regimes and output: a Markov switching analysis
Granger causality and regime inference in Bayesian Markov-Switching VARs
Estimating a Taylor Rule with Markov Switching Regimes for Switzerland
Modelling the Australasian financial cycle: A Markov-Regime Switching Approach
Markov Perfect Equilibria in Differential Games with Regime Switching Strategies
Four Essays on Markov-Switching DSGE and Markov-Switching VAR Models
Markov-switching proxy BVARs
A Markov Switching Cookbook
Growth, Savings, Financial Markets and Markov Switching Regimes
Markov switching regimes in a monetary exchange rate model
Causality and Regime Inference in a Markov Switching VAR
Time Varying Transition Probabilities for Markov Regime Switching Models
Sudden stop regimes and output: a Markov switching analysis
Granger causality and regime inference in Bayesian Markov-Switching VARs
Estimating a Taylor Rule with Markov Switching Regimes for Switzerland
Modelling the Australasian financial cycle: A Markov-Regime Switching Approach
Markov Perfect Equilibria in Differential Games with Regime Switching Strategies
Four Essays on Markov-Switching DSGE and Markov-Switching VAR Models
Markov-switching proxy BVARs
A Markov Switching Cookbook
Growth, Savings, Financial Markets and Markov Switching Regimes
Markov switching regimes in a monetary exchange rate model
Causality and Regime Inference in a Markov Switching VAR
Time Varying Transition Probabilities for Markov Regime Switching Models
Sudden stop regimes and output: a Markov switching analysis
Granger causality and regime inference in Bayesian Markov-Switching VARs
Estimating a Taylor Rule with Markov Switching Regimes for Switzerland
Modelling the Australasian financial cycle: A Markov-Regime Switching Approach
Markov Perfect Equilibria in Differential Games with Regime Switching Strategies
Four Essays on Markov-Switching DSGE and Markov-Switching VAR Models
Markov-switching proxy BVARs