Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/269867 
Year of Publication: 
2023
Series/Report no.: 
Deutsche Bundesbank Discussion Paper No. 06/2023
Publisher: 
Deutsche Bundesbank, Frankfurt a. M.
Abstract: 
This article studies long-horizon dynamic asset allocation strategies with recursive parameter updating. The parameter estimates for the regime-switching dynamics vary as more and more datapoints are observed and the sample size increases. In such a setting, the globally optimal portfolio strategy cannot be determined due to computational complexity. Among a set of suboptimal strategies, the portfolio performance can be improved substantially if the dynamics of the regimes are estimated from fundamental macroeconomic instead of financial return data. Especially after highly uncertain times, the estimation based on financial market data identifies extreme regimes, leading to extreme hedging demands against regime changes.
Subjects: 
Regime switching models
asset allocation
macro-based portfolio strategies
parameter updating
JEL: 
G11
D83
E44
ISBN: 
978-3-95729-937-6
Document Type: 
Working Paper

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