Portfolios optimization under regime switching model: Evidences in the american bonds and other financial assets

Abstract

© 2021, The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG. In this study, we aim to investigate the high dimension portfolio optimization by using Markov Switching Copula-based GJR-GARCH model. The proposed model is flexible and can capture the dependence structure that changes over time. This model is applied to 8 times series, including DJIA, FTSE, COMEX Gold, US Dollar Index, Crude Oil, and US Bonds (one-month, 2-year, and 5-year. In order to construct a portfolio, first we use GJR-GARCH to capture the volatility of each asset. Then, the Markov Switching copula is used to measure the dependence across assets. Finally, the results from MS-Copula is used to construct portfolios and Value at Risk and Expected Shortfall are used for optimal portfolio selection.