Asset Allocation Modeling: A Combined Regime-Switching and Black-Litterman Model

Document Type : applied


1 Associate Prof., Economic Department, Khatam University, Tehran, Iran

2 MSc., Finance Management, Khatam University, Tehran, Iran

3 Associate Prof., Industrial Engineering Department, Khatam University, Tehran, Iran


One of the most debated issues of investment management is the relative importance of asset allocation versus security selection. Regimes changes present a big challenge to traditional asset allocation, demanding a more adaptive approach. The purpose of this study is to develop a framework for dynamic asset allocation modeling in the presence of regime switching. This research builds on previous works to develop a combined regime-switching and Black-Litterman for optimal asset allocation in Iran asset classes considering data during 212 months, ranging from March 1999 to September 2016. The results show the existence of different financial regimes that lead to variable optimal asset allocations across different regimes. Finally, it is suggested that the combination of regime-switching and Black-Litterman model for mixture of stock and 1-year banking deposit investment gives significantly better results than other models in terms of performance and a modified sharp ratio.


Main Subjects

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