Portfolio optimization under regime-switching with market path-dependent returns

Document Type : Research Article

Author

Department of Mathematics, Khansar Campus, University of Isfahan, Isfahan, Iran

Abstract

Asset prices typically follow significant trends influenced by the economic environment or overall investor sentiment. Regime-switching is commonly employed to capture asset price dynamics, as it effectively describes significant trends and reflects the changing correlations of asset returns over various periods. This paper explores  multi-period mean-variance portfolio optimization under regime-switching with path-dependent returns. Unlike conventional models, this paper assumes that asset returns depend on the entire path of market states rather than just the current one. Consequently, investors base their decisions on all observed states up to the current moment. Utilizing dynamic programming techniques, we derive the path-dependent optimal portfolio strategy and the mean-variance efficient frontier in closed form. Furthermore, we demonstrate that the results from the traditional regime-switching model,
can be viewed as specific cases of our proposed model.

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Main Subjects

Journal of Mathematical Modeling
Volume 13, Issue 3
July 2025
Pages 485-496

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