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Bridge over ocean
1 May 2012 Financial Analysts Journal Volume 68, Issue 3

Regime Shifts: Implications for Dynamic Strategies (corrected)

  1. Mark P. Kritzman, CFA
  2. Sébastien Page, CFA
  3. David Turkington, CFA

Regime shifts present significant challenges for investors because they cause performance to depart significantly from the ranges implied by long-term averages of means and covariances. But regime shifts also present opportunities for gain. The authors show how to apply Markov-switching models to forecast regimes in market turbulence, inflation, and economic growth. They found that a dynamic process outperformed static asset allocation in backtests, especially for investors who seek to avoid large losses.

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