Markov Switching in Portfolio Choice and Asset Pricing Models: A Survey

Abstract

I survey applications of Markov switching models to the asset pricing and portfolio choice literatures. In particular, I discuss the potential that Markov switching models have to fit financial time series and at the same time provide powerful tools to test hypotheses formulated in the light of financial theories, and to generate positive economic value, as measured by risk-adjusted performances, in dynamic asset allocation applications. The chapter also reviews the role of Markov switching dynamics in modern asset pricing models in which the no-arbitrage principle is used to characterize the properties of the fundamental pricing measure in the presence of regimes.

Citation

Guidolin, M. (2011), "Markov Switching in Portfolio Choice and Asset Pricing Models: A Survey", Drukker, D.M. (Ed.) Missing Data Methods: Time-Series Methods and Applications (Advances in Econometrics, Vol. 27 Part 2), Emerald Group Publishing Limited, Leeds, pp. 87-178. https://doi.org/10.1108/S0731-9053(2011)000027B005