Rights International Conference on Business Intelligence and FinancialEngineering Proceedings. Copyright © IEEE. Asset Allocation Under Regime-Switching Models

Abstract—We discuss an optimal asset allocation problem in a wide class of discrete-time regime-switching models includ-ing the hidden Markovian regime-switching (HMRS) model, the interactive hidden Markovian regime-switching (IHMRS) model and the self-exciting threshold autoregressive (SETAR) model. In the optimal asset allocation problem, the object of the investor is to select an optimal portfolio strategy so as to maximize the expected utility of wealth over a finite investment horizon. We solve the optimal portfolio problem using a dynamic programming approach in a discrete-time set up. Numerical results are provided to illustrate the practical implementation of the models and the impacts of different types of regime switching on optimal portfolio strategies. Keywords-Asset Allocation; Regime-Switching Models; IHMM; HMM; SETAR Model; Stochastic Dynamical System