Markov-switching Asset Allocation: Do Profitable Strategies Exist?JanBullaauthorSaschaMergnerauthorIngoBullaauthorAndréSesboüéauthorChristopheChesneauauthorThis paper proposes a straightforward Markov-switching asset allocation model, which reduces the market exposure to periods of high volatility. The main purpose of the study is to examine the performance of a regime-based asset allocation strategy under realistic assumptions, compared to a buy and hold strategy. An empirical study, utilizing daily return series of major equity indices in the US, Japan, and Germany over the last 40 years, investigates the performance of the model. In an out-of-sample context, the strategy proves profitable after taking transaction costs into account. For the regional markets under consideration, the volatility reduces on average by 41%. Additionally, annualized excess returns attain 18.5 to 201.6 basis points.C13 - Estimation: GeneralG11 - Portfolio Choice ; Investment DecisionsG15 - International Financial MarketsC22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion ProcessesC15 - Statistical Simulation Methods: GeneralE44 - Financial Markets and the Macroeconomy2010-01-07MPRA Paper