Strategic asset allocation under a fractional hidden Markov model

Robert J. Elliott, Tak Kuen Siu

Research output: Contribution to journalArticle

2 Citations (Scopus)

Abstract

Strategic asset allocation is discussed in a discrete-time economy, where the rates of return from asset classes are explained in terms of some observable and hidden factors. We extend the existing models by incorporating long-term memory in the rates of return and observable economic factors, which have been documented in the empirical literature. Hidden factors are described by a discrete-time, finite-state, hidden Markov chain noisily observed in a fractional Gaussian process. The strategic asset allocation problem is discussed in a mean-variance utility framework. Filtering and parameter estimation are also considered in the hybrid model.

Original languageEnglish
Pages (from-to)609-626
Number of pages18
JournalMethodology and Computing in Applied Probability
Volume16
Issue number3
DOIs
Publication statusPublished - Sep 2014

Keywords

  • Fractional Gaussian VAR process
  • Hidden Markov models
  • Long memory
  • Mean-variance utility
  • Strategic asset allocation

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