Ang and Timmermann 2012
“Regime Changes and Financial Markets” by Andrew Ang (Columbia Business School, NBER) and Allan Timmermann (UC San Diego), circulated as NBER Working Paper 17182 (June 2011) and published in 2012 in the Annual Review of Financial Economics. It is the canonical survey of regime-switching modelling in finance: regimes are an econometrically identified latent state — often mapping to recessions/expansions, regulatory eras, and high/low-volatility or bull/bear periods — that parsimoniously reproduces fat tails, heteroskedasticity, skewness and time-varying correlations. The paper stresses the filtering problem: the true regime is rarely known in real time, so investors rely on filtered probabilities that “miss an important regime change … and at other times issue false alarms”. It frames the portfolio value of regimes as risk management — holding the high-Sharpe portfolio in the calm regime and shifting toward the risk-free asset in the bad regime — with the cited “cost of ignoring regimes” being a utility loss, not a documented after-cost excess return. It appears in this vault as the foundational reference for Regime Classification and the filtered-vs-smoothed distinction.
Connections
- Regime Classification — relates, source: https://www.nber.org/system/files/working_papers/w17182/w17182.pdf
- Markov Regime-Switching Model — proposes_model, source: https://www.nber.org/system/files/working_papers/w17182/w17182.pdf
- Real-Time Regime Identification Lag — supports, source: https://www.nber.org/system/files/working_papers/w17182/w17182.pdf
- Regime-Based Asset Allocation — relates, source: https://www.nber.org/system/files/working_papers/w17182/w17182.pdf