Asset allocation under multivariate regime switching

This paper studies asset allocation decisions in the presence of regime switching in asset returns. We find evidence that four separate regimes - characterized as crash, slow growth, bull and recovery states - are required to capture the joint distribution of stock and bond returns. Optimal asset allocations vary considerably across these states and change over time as investors revise their estimates of the state probabilities. In the crash state, buy-and-hold investors allocate more of their portfolio to stocks the longer their investment horizon, while the optimal allocation to stocks declines as a function of the investment horizon in bull markets. The joint effects of learning about state probabilities and predictability of asset returns from the dividend yield give rise to a non-monotonic relationship between the investment horizon and the demand for stocks. Welfare costs from ignoring regime switching can be substantial even after accounting for parameter uncertainty. Out-of-sample forecasting experiments confirm the economic importance of accounting for the presence of regimes in asset returns. ; Earlier title: Strategic asset allocation and consumption decisions under multivariate regime switchingInvestments ; Consumption (Economics)

An econometric model of nonlinear dynamics in the joint distribution of stock and bond returns

This paper considers a variety of econometric models for the joint distribution of US stock and bond returns in the presence of regime switching dynamics. While simple two- or three-state models capture the univariate dynamics in bond and stock returns, a more complicated four state model with regimes characterized as crash, slow growth, bull and recovery states is required to capture their joint distribution. The transition probability matrix of this model has a very particular form. Exits from the crash state are almost always to the recovery state and occur with close to 50 percent chance suggesting a bounce-back effect from the crash to the recovery state.Time-series analysis ; Stocks ; Bond market

Optimal portfolio choice under regime switching, skew and kurtosis preferences

This paper proposes a new tractable approach to solving multi-period asset allocation problems. We assume that investor preferences are defined over moments of the terminal wealth distribution such as its skew and kurtosis. Time-variations in investment opportunities are driven by a regime switching process that can capture bull and bear states. We develop analytical methods that only require solving a small set of difference equations and thus are very convenient to use. These methods are applied to a simple portfolio selection problem involving choosing between a stock index and a risk-free asset in the presence of bull and bear states in the return distribution. If the market is in a bear state, investors increase allocations to stocks the longer their time horizon. Conversely, in bull markets it is optimal for investors to decrease allocations to stocks the longer their investment horizon.Assets (Accounting)

Forecasts of U.S. short-term interest rates: a flexible forecast combination approach

This paper develops a flexible approach to combine forecasts of future spot rates with forecasts from time-series models or macroeconomic variables. We find empirical evidence that accounting for both regimes in interest rate dynamics and combining forecasts from different models helps improve the out-of-sample forecasting performance for US short-term rates. Imposing restrictions from the expectations hypothesis on the forecasting model are found to help at long forecasting horizons.Interest rates ; Forecasting

Properties of equilibrium asset prices under alternative learning schemes

This paper characterizes equilibrium asset prices under adaptive, rational and Bayesian learning schemes in a model where dividends evolve on a binomial lattice. The properties of equilibrium stock and bond prices under learning are shown to differ significantly compared with prices under full information rational expectations. Learning causes the discount factor and risk-neutral probability measure to become path-dependent and introduces serial correlation and volatility clustering in stock returns. We also derive conditions under which the expected value and volatility of stock prices will be higher under learning than under full information. Finally, we derive restrictions on prior beliefs under which Bayesian and rational learning lead to identical prices and show how the results can be generalized to more complex settings where dividends follow either multi-state i.i.d. distributions or multi-state Markov chains.Assets (Accounting) ; Rational expectations (Economic theory)

Term structure of risk under alternative econometric specifications

This paper characterizes the term structure of risk measures such as Value at Risk (VaR) and expected shortfall under different econometric approaches including multivariate regime switching, GARCH-in-mean models with student-t errors, two-component GARCH models and a non-parametric bootstrap. We show how to derive the risk measures for each of these models and document large variations in term structures across econometric specifications. An out-of-sample forecasting experiment applied to stock, bond and cash portfolios suggests that the best model is asset- and horizon specific but that the bootstrap and regime switching model are best overall for VaR levels of 5% and 1%, respectively.Time-series analysis ; Econometric models

Size and value anomalies under regime shifts

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 significantly across regimes. Regimes are also found to have a large impact on the optimal asset allocation - especially under rebalancing - and on investors' welfare.Assets (Accounting)

International asset allocation under regime switching, skew and kurtosis preferences

This paper proposes a new tractable approach to solving asset allocation problems in situations with a large number of risky assets which pose problems for standard approaches. Investor preferences are assumed to be defined over moments of the wealth distribution such as its mean, variance, skew and kurtosis. Time-variations in investment opportunities are represented by a flexible regime switching process. In the context of a four-moment international CAPM specification that relates stock returns in five regions to returns on a global market portfolio, we find evidence of distinct bull and bear states. Ignoring regimes, an unhedged US investor’s optimal portfolio is strongly diversified internationally. The presence of regimes in the return distribution leads to a large increase in the investor’s optimal holdings of US stocks as does the introduction of skew and kurtosis preferences. Our paper therefore offers an explanation of the strong home bias observed in US investors’ asset allocation based on regime switching and skew and kurtosis preferences.Investments ; Asset pricing ; International finance

Carrier relaxation in Si/SiO2_2 quantum dots

Carrier relaxation due to both optical and nonradiative intraband transitions in silicon quantum dots in SiO$_2$ has been considered. Interaction of confined holes with optical phonons has been studied. The Huang-Rhys factor is calculated for such transitions. The probability of intraband transition of a confined hole emitting several optical phonons is estimated.Comment: 8 pages, 2 figures, submitted as an extended abstract to the E-MRS Spring Meeting 200

The association between early-onset schizophrenia with employment, income, education, and cohabitation status : nationwide study with 35 years of follow-up

Purpose Individuals with schizophrenia have been reported to have low employment rates. We examined the associations of schizophrenia with employment, income, and status of cohabitation from a work life course perspective. Methods Nationwide cohort study including all individuals (n = 2,390,127) born in Denmark between 1955 and 1991, who were alive at their 25th birthday. Diagnosis of schizophrenia (yes/no) between ages 15 and 25 was used as an exposure. Employment status, annual wage or self-employment earnings, level of education, and cohabitant status from the age of 25–61 (years 1980–2016) were used as outcomes. Results Schizophrenia diagnosis between ages 15 and 25 (n = 9448) was associated with higher odds of not being employed (at the age of 30: OR 39.4, 95% CI 36.5–42.6), having no secondary or higher education (7.4, 7.0–7.8), and living alone (7.6, 7.2–8.1). These odds ratios were two-to-three times lower and decreasing over time for those individuals who did not receive treatment in a psychiatric inpatient or outpatient clinic for schizophrenia after the age of 25. Between ages 25–61, individuals with schizophrenia have cumulative earning of $224,000, which is 14% of the amount that the individuals who have not been diagnosed with schizophrenia earn. Conclusions Individuals with schizophrenia are at high risk of being outside the labour market and living alone throughout their entire life, resulting in an enormous societal loss in earnings. Individuals with less chronic course of schizophrenia had a gradual but substantial improvement throughout their work life.Peer reviewe