This paper finds strong evidence of time-variations in the joint distribution of returns on a stock market portfolio and portfolios tracking size- and value effects. Mean returns, volatilities and correlations between these equity portfolios are found to be driven by underlying regimes that introduce short-run market timing opportunities for investors. The magnitude of the premia on the size and value portfolios and their hedging properties are found to vary across regimes. Regimes are shown to have a large impact both on the optimal asset allocation—especially under rebalancing—and on investors’ utility. Regimes also have a considerable impact on hedging demands, which are positive when the investor starts from more favorable regimes and negative when starting from bad states. Recursive out-of-sample forecasting experiments show that portfolio strategies based onmodels that account for regimes dominate single-state benchmarks.

Size and Value Anomalies under Regime Shifts

GUIDOLIN, MASSIMO;
2008

Abstract

This paper finds strong evidence of time-variations in the joint distribution of returns on a stock market portfolio and portfolios tracking size- and value effects. Mean returns, volatilities and correlations between these equity portfolios are found to be driven by underlying regimes that introduce short-run market timing opportunities for investors. The magnitude of the premia on the size and value portfolios and their hedging properties are found to vary across regimes. Regimes are shown to have a large impact both on the optimal asset allocation—especially under rebalancing—and on investors’ utility. Regimes also have a considerable impact on hedging demands, which are positive when the investor starts from more favorable regimes and negative when starting from bad states. Recursive out-of-sample forecasting experiments show that portfolio strategies based onmodels that account for regimes dominate single-state benchmarks.
2008
Guidolin, Massimo; A., Timmermann
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11565/3719731
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