Browsing by Author "Steenkamp, Cara Yvette"

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    Modern portfolio optimisation under regime switching
    (Stellenbosch : Stellenbosch University, 2022-04) Steenkamp, Cara Yvette; Alfeus, Mesias; Stellenbosch University. Faculty of Economic and Management Sciences. Dept. of Statistics and Actuarial Science.
    ENGLISH SUMMARY: The main objective of this assignment is to consider modern portfolio optimisation under regimes. Unobservable regimes are assumed to be modulated by a time-change Markov process. These models are well-known as Markov regime switching models. The Markov regime switching models are applied to portfolios that consist of a lagged model and a factor model. The lagged model represents a portfolio of 20 stocks which have been lagged by a day and then classified into regimes whereas the factor model uses 5 different global risk factors or measures namely, the 3 Fama-French factors, VIX and a spread between the 3-month JIBAR rate and SAFEX overnight rate to estimate the unobserved regimes for the portfolio. This assignment considers two regimes. Two regimes are classified representing the bull and bear markets, periods when the financial market is doing well and when the market is on a downturn respectively. Thereafter, optimisation is performed by taking the estimated regimes into account and obtaining the optimal portfolio allocations. Optimisation methods such as Sharpe ratio method and risk budget method are investigated. For each of these optimisation methods the portfolios were rebalanced to evaluate the financial markets at the start of the new investment period, classify it either into a new regime or remaining in the current state and then adjusting the portfolio weights. Portfolio optimisation including the regimes are then compared to classical modern portfolio optimisation without regimes consideration. Results show that portfolio optimisation with regimes obtained the highest Sharpe ratio, indicating the economic benefit of inclusion of regime switching characteristics in modern portfolio optimisation.