This thesis presents the potential opportunities of global asset allocation and the possible enhancement of these opportunities from using a Markov Switching Model. The thesis extends upon previous conditional asset pricing studies in global asset allocation, such as those done by Ilamnen (1995), Harvey, Solnik and Zhou (1992) and Bilson (1993), where expected future returns are forecast based on conditional variables. The finding of these studies, and many others, are combined with the works on Markov Switching models and market segmentation theories to create a uniform structure for analysing regime switching properties in currencies, international equities and international bond markets. This thesis is segregated into 4 major sections. The chapters 1-4 develop a unified framework that is used in the analysis of markets. The chapters 5-7 are focused on currencies, international equities and international bonds. For each market a model is constructed that is based upon the structure proposed by Frankel and Froot (1988). In this model the market is segmented into two groups ?? value based investors and momentum based investors. To replicate this structure, a two regime Markov Switching model is used, where one regime is constructed as a value regime and the second is constructed as a momentum regime. These models are then compared to linear versions of the models, to see whether there is any additional benefit to the application of regime switching methods. In conjunction with testing the potential benefits of the Markov Regime Switching process, this study also investigates the very nature, or characteristics of regime switching in the international markets. This is undertaken though some alternate models and enhancements to see whether there is any predictability, or characterisations can be made of the switching process. To ensure a comprehensive analysis, several analytical methods have been used, including extensive econometric modelling, statistical analysis of forecasts and portfolio back testing. A number of conclusions can be drawn from the results. Firstly it appears that there is substantial evidence of regime switching in international markets, such as that shown in a Frankel-Froot framework. This in turn has major implication for the understanding of the way in which international markets function, and further the empirical evidence supports many of the anecdotal observations of market based participants. Secondly, there appears to be a strong level of economic relevance to the modelling. The models are shown to generate a theoretical economic profit, which shows that the international markets are only semi efficient. Further, forecasts generated from the Markov Switching models outperform the linear counterparts in economic significance in portfolio tests. However, for both equities and bonds, the general accuracy of the forecast tends to be inferior to the linear counterparts. Finally, the nature of regime switching is investigated in detail, particularly in reference to 3 potential drivers ?? greed, fear and success. The evidence shows that these can help explain the characteristics of regime switching, as in some cases potentially adding economic value. However, it seems that success is more important than a broader economic environment.

Thesis (Ph. D.)--University of Chicago, Dept. of Economics, June 2001. / Includes bibliographical references. Also available on the Internet.

published_or_final_version / Economics and Finance / Doctoral / Doctor of Philosophy

This thesis presents the potential opportunities of global asset allocation and the possible enhancement of these opportunities from using a Markov Switching Model. The thesis extends upon previous conditional asset pricing studies in global asset allocation, such as those done by Ilamnen (1995), Harvey, Solnik and Zhou (1992) and Bilson (1993), where expected future returns are forecast based on conditional variables. The finding of these studies, and many others, are combined with the works on Markov Switching models and market segmentation theories to create a uniform structure for analysing regime switching properties in currencies, international equities and international bond markets. This thesis is segregated into 4 major sections. The chapters 1-4 develop a unified framework that is used in the analysis of markets. The chapters 5-7 are focused on currencies, international equities and international bonds. For each market a model is constructed that is based upon the structure proposed by Frankel and Froot (1988). In this model the market is segmented into two groups ?? value based investors and momentum based investors. To replicate this structure, a two regime Markov Switching model is used, where one regime is constructed as a value regime and the second is constructed as a momentum regime. These models are then compared to linear versions of the models, to see whether there is any additional benefit to the application of regime switching methods. In conjunction with testing the potential benefits of the Markov Regime Switching process, this study also investigates the very nature, or characteristics of regime switching in the international markets. This is undertaken though some alternate models and enhancements to see whether there is any predictability, or characterisations can be made of the switching process. To ensure a comprehensive analysis, several analytical methods have been used, including extensive econometric modelling, statistical analysis of forecasts and portfolio back testing. A number of conclusions can be drawn from the results. Firstly it appears that there is substantial evidence of regime switching in international markets, such as that shown in a Frankel-Froot framework. This in turn has major implication for the understanding of the way in which international markets function, and further the empirical evidence supports many of the anecdotal observations of market based participants. Secondly, there appears to be a strong level of economic relevance to the modelling. The models are shown to generate a theoretical economic profit, which shows that the international markets are only semi efficient. Further, forecasts generated from the Markov Switching models outperform the linear counterparts in economic significance in portfolio tests. However, for both equities and bonds, the general accuracy of the forecast tends to be inferior to the linear counterparts. Finally, the nature of regime switching is investigated in detail, particularly in reference to 3 potential drivers ?? greed, fear and success. The evidence shows that these can help explain the characteristics of regime switching, as in some cases potentially adding economic value. However, it seems that success is more important than a broader economic environment.

Thesis (Ph.D.)--York University, 2007. Graduate Programme in Schulich School of Business. / Typescript. Includes bibliographical references. Also available on the Internet. MODE OF ACCESS via web browser by entering the following URL: http://gateway.proquest.com/openurl?url_ver=Z39.88-2004&res_dat=xri:pqdiss&rft_val_fmt=info:ofi/fmt:kev:mtx:dissertation&rft_dat=xri:pqdiss:NR29334

Thesis (Ph. D.)--Ohio State University, 2008. / Title from first page of PDF file. Includes bibliographical references (p. 122-129).

Thesis (Ph. D.)--University of Hong Kong, 2005. / Title proper from title frame. Also available in printed format.

This thesis consists of two essays analyzing the effect of uncertainty in macroeconomic and financial settings. Inspired by the counter-cyclical pattern of uncertainty and the role played by capital reallocation in Total Factor Productivity, we propose a theoretical viewpoint on uncertainty-driven business cycles in the first essay. Relying on the interaction between financial market and real sector, we are able to build up a transmission mechanism from uncertainty to business cycle by introducing a financial contract between firms and financial intermediaries. By setting up two types of firm with different production technology in a general equilibrium model, we show that information asymmetry leads firms with financing needs to be financially constrained. Due to information asymmetry, first best case is unachievable and production resources are allocated more to firms without financing needs. When uncertainty changes, the lending decision of financial intermediary also changes, further affecting firms’ production capacities. Production resources are reallocated between the two types of firms which generates fluctuations in TFP and other aggregates. More importantly, firms with financing needs is assumed with better production technology than the one adopted by the other type on average. Increase in uncertainty worsens the informational problem, reduces funds provided to firms with better technology, causes reallocation of resources to the other type, and further decreases productivity of the economy as a whole. This is in line with an economic downturn and also consistent with the counter-cyclicality of uncertainty. We also conduct a quantitative analysis by calibrating the model to the data and the estimated results provide corroborating evidence for the theory. Using a merged data-set of US firms during years 1971-2008, we empirically examine the impact of uncertainty on capital reallocation via financial friction in the second essay. By adopting KZ index as an indicator for firms’ financial statuses, we decompose the uncertainty-capital reallocation relation into three hypotheses. Using cross-sectional dispersion of stock return as a measure for uncertainty, we find that uncertainty is negatively associated with firms’ financial statuses. A firm with high uncertainty level is more likely to be in a low position of financial status. Second, uncertainty is in a negative relation with capital reallocation, which means capital reallocation decreases at firm level when uncertainty increases. Third, by sorting firms into different groups based on their financial statuses, we find that firms which are in worse financial situation are more responsive to uncertainty change. The finding is consistent with our prediction that uncertainty affects capital reallocation through financial friction. We employ both reduced-form and structural estimation strategies to examine our predictions, and all regression results are supportive. To further test the role of financial friction in the relation, we also sort firms into different groups by SIC code. And we find that, firms in industries relying more on financial market for external financing are more responsive to uncertainty change. / published_or_final_version / Economics and Finance / Doctoral / Doctor of Philosophy

Thesis (Ph. D.)--University of Chicago, Dept. of Economics, June 1998. / Includes bibliographical references. Also available on the Internet.

Thesis (Ph. D.)--University of Chicago Graduate School of Business, June 1999. / Includes bibliographical references. Also available on the Internet.