Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/238332
Authors: 
Dapena, José P.
Serur, Juan Andrés
Siri, Julián R.
Year of Publication: 
2019
Series/Report no.: 
Serie Documentos de Trabajo No. 706
Abstract: 
Unlike passive management, where investors almost do not buy and sell securities, active management involves a set of trading rules that govern investment decisions regarding mainly market timing. In this paper, we take the basics of active management and the two fund separation approach, to exploit the fact that an investor can switch between the market portfolio and the risk free asset according to the perceived state of the nature. Our purpose is to evaluate if there is an active management premium by testing performance with our own non-conventional multifactor model, constructed with a Hidden Markov Model which depending on the market states signaled by the level of volatility spread. We have documented that effectively, there is present a premium for actively manage the strategies, giving evidence against the idea that "active managers" destroy capital. We then propose the volatility spread as the active management factor into the Carhart's model used to evaluate trading strategies with respect to a benchmark portfolio.
Subjects: 
Regime switching
active investment
two fund separation
excess returns
hidden markov model
VIX
JEL: 
C1
C3
N2
G11
Document Type: 
Working Paper

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