An astute reader suggested reproducing the results from a recent article on regime analysis by Kritzman et al., Regime Shifts: Implications for Dynamic Strategies in FAJ (May / June 2012). Beyond identifying regimes, we also want to know the probability of being in a given regime at any given point in time.activity answer bubble economic economic activity model mortgage mortgage bubble normal panic regime volatility
A variety of folks gave thoughtful replies: Josh Brown, Flex Salmon, David Merkel, Scott Bell, the Macro Men, and bunch of anonymous professional traders.
Yet, perhaps there is a common root cause at work, not yet stated: implicit momentum bias.alpha asset managers bias bound markets exhibit funds hedge majority market momentum ratings strategies
Index Return Decomposition prompted several readers to inquire about forecasting the signs of returns, as implied by the decomposition variable. This literature tends to be a bit obtuse, due to commonly unstated stylistic assumptions regarding conditional return dynamics.code conditional dynamics exploratory interesting intuition literature quick review survey topic worth
A variety of techniques exist for estimating parameters of the return decomposition model, previously introduced in Index Return Decomposition.
This assumption permits focus on estimating , providing insight into the mixing behavior of the return being decomposed: if a stock return behaves like its index, then mixing is low with small (in the limit, when a stock behaves identical to its index, as no mixing is required); in contrast, the stock return behaves independent from its index on a regular basis, then mixing is high with a large .considers estimation idiosyncratic index mixing negative news originate positive post returns