Identifying economic regimes

Reducing downside risks for university endowments and foundations

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

One of the most durable patterns in market behavior involves contagion-increases in correlation and volatility-during crash periods such as 2008. This condition can cause major problems for an investor when markets severely contract and anticipated diversification benefits vanish. To address contagion, the authors implement a machinelearning algorithm, trend filtering, to capture distinctive economic conditions. Over long horizons, they find that a multiregime simulation provides more accurate estimates of downside risk compared with traditional static portfolio models and can help in evaluating strategies for reducing the worstcase outcomes. The approach readily applies to nonprofit institutions that depend upon their endowment capital to fund liabilities and meet goals.

Original languageEnglish (US)
Pages (from-to)100-108
Number of pages9
JournalJournal of Portfolio Management
Volume43
Issue number1
DOIs
StatePublished - Sep 1 2016

Fingerprint

Downside risk
Contagion
Endowments
Economics
Portfolio model
Market behavior
Simulation
Investors
Liability
Durables
Non-profit institutions
Machine learning
Economic conditions
Diversification benefits
Crash

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics
  • Accounting
  • Business, Management and Accounting(all)
  • Finance

Cite this

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Identifying economic regimes : Reducing downside risks for university endowments and foundations. / Mulvey, John Michael; Liu, Han.

In: Journal of Portfolio Management, Vol. 43, No. 1, 01.09.2016, p. 100-108.

Research output: Contribution to journalArticle

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