Regime-switching modelsare used instrategic asset allocationtocapture shifts in market conditions, such as economic recessions, financial crises, or climate-related disruptions. These models allow investors toadjust portfolio allocations based on different market regimes.
They do capture fat tails (A),meaning they can account for extreme events.
They incorporate both historical and forward-looking data (B).
[References:, CFA Institute Guide to Regime-Switching Models, MSCI Strategic Asset Allocation in ESG Investing, Principles for Responsible Investment (PRI) Risk Management Framework, ========, , ]
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