Volatility Regime

A volatility regime is a market state defined by the variance of returns — typically a low-variance and a high-variance regime — rather than by the sign of expected return. Bulla et al. 2010 deliberately built its two-state Markov Regime-Switching Model on volatility alone, exiting equities in the high-variance regime, and obtained a Sharpe-ratio gain mainly because high-volatility periods empirically coincide with falling prices (the Schwert effect). Volatility regimes are far more reliably detectable than return-direction regimes, which is a core reason regime-switching models are credible as a Regime Classification / risk-filtering tool but weak as directional alpha sources.

Connections

• Bulla et al. 2010 — detects_regime, source: https://mpra.ub.uni-muenchen.de/21154/1/MPRA_paper_21154.pdf
• Markov Regime-Switching Model — relates, source: https://mpra.ub.uni-muenchen.de/21154/1/MPRA_paper_21154.pdf
• Regime Classification — part-of, source: https://mpra.ub.uni-muenchen.de/21154/1/MPRA_paper_21154.pdf