Empirical Study On Cross-district And Cross-industry Asset Allocation Model Under Regime Switching Framework

Modern investment portfolio theory is widely used in practice with the representative of Markowitz(1952),the theory assumes that the time series of financial asset return is normally distributed,and the risk parameters reflected the market remain unchanged throughout the investment period.A large number of empirical studies show that the time series of financial asset return often exhibit nonlinear,dynamic structural changes.Under different market regime,the return and risk of assets show asymmetrical feature.At the same time,co-movement between different markets is also extremely important in the portfolio management,the Financial Crisis had showed that the contagion among different regions and industries increasing in 2007 to 2009,if the portfolio lack of diversity will lead to extreme losses.Stocks performance across districts and industries is different under different market regimes,the co-movement between different markets and sector rotation effect can cause such funds divert among different districts and industries.As can be seen from the above analysis,the market regime market and the district,industry sector rotation effect is critical to portfolio selection.In this paper,the Shanghai and Shenzhen 300 Index and the district,industry classification index covered by it are used,using Markov regime switching model captures the nonlinear dynamic structural change of financial asset return series,and further considering sector rotation effect caused by liquidity between different districts and industries under different market regimes,proposing the model of cross-district and cross-industry asset allocation based on regime switching.Incorporating the market regime and sector rotation effects in portfolio model can describe the return and risk characteristics of assets under asymmetric market regimes,disperse non-systematic risk while reducing market risk.On this basis,detailed analysis the impact of market regimes and sector rotation effect on the asset allocation.The study show that:there are significant structural dynamic changes in Chinese financial market,which can be divided into bear and bull markets,and the optimal asset allocation structure under bear market is inconsistent with bull market,asset allocation under regime switching improves returns to investors.The research shows that cross-district and cross-industry asset allocation model under regime switching framework could describe the return and risk characteristics of assets under asymmetric market regimes,disperse non-systematic risk while reducing market risk,provide valuable reference for investors decisions.