Overview of Financial Market Regime Change

Financial markets sometimes switch states (regimes), with key investment decision statistics (such as average return and volatility of returns) shifting dramatically for extended intervals. A simple example of financial market regimes is the designation of bull and bear stock market states, estimated (for example) by a broad index being above or below its long-interval simple moving average. What is the big picture on the concepts, estimation and application of regime changes in investing? In their June 2011 paper entitled “Regime Changes and Financial Markets”, Andrew Ang and Allan Timmermann review the basics of modeling regime switches and applying such models to asset allocation decisions. Drawing on prior theoretical and empirical research, they conclude that: (more…)