Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

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

Andreas Graflund () and Birger Nilsson ()
Additional contact information
Andreas Graflund: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Birger Nilsson: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

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

JEL-codes: C15; C32; G11; G15

26 pages, March 4, 2002

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