Multi-Asset Portfolio Returns: A Markov Switching Copula-Based Approach

Kongliang Zhu, Woraphon Yamaka, Songsak Sriboonchitta

Abstract

The motivation for undertaking this paper stems from doubt thatwhether investors should keep the same strategy on the portfolio over periods ofmarket regime shift. This paper investigates portfolio risk structure for multi-asset allocation issue using a Markov Switching copula-based approach. With thismethod we focus on returns in the different regime to improve the performance ofportfolios. We conduct a Markov Switching with high dimension copula in order tomeasure a dependency of the variables, thus the model is flexible and can capturethe economic behaviour change over time. The conditional Value at Risk is takeninto account in the economic change and we employ Bayesian estimation methodto estimate parameters of the model.