Scandinavian Working Papers in Economics
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Department of Economics, Lund University Working Papers, Department of Economics, Lund University

No 2002:8:
Dynamic Portfolio Selection: The Relevance of Switching Regimes and Investment Horizon

Andreas Graflund () and Birger Nilsson ()

Abstract: This paper investigates the questions of dynamic portfolio selection and intertemporal hedging within a Markovian regime-switching framework. The investment opportunity set is spanned by a well-diversified home-market portfolio and the risk-free asset. Our results highlight the economic importance of regimes, as optimal portfolio weights are clearly dependent on the prevailing regime. We present evidence that the question of intertemporal hedging is a more complex issue than is hinted in the previous literature, since demand for intertemporal hedging is present in some regimes, but not in others. Finally, our findings are qualitatively unchanged across the four largest stock markets in the in the world, the US, Japan, the UK and Germany.

Keywords: intertemporal hedging; dynamic portfolio selection; regime switching; (follow links to similar papers)

JEL-Codes: C15; C32; G11; G15; (follow links to similar papers)

26 pages, March 4, 2002

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This paper is published as:
Graflund, Andreas and Birger Nilsson, (2003), 'Dynamic Portfolio Selection: The Relevance of Switching Regimes and Investment Horizon', European Financial Management, Vol. 9, June, No. 2, pages 179-200

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