Regime detection and classification are important in portfolio management and asset allocation.
Three state HMM is the sweet spot for regime work. The real challenge is persistence; daily transition probabilities decay fast. Do you smooth them?
No. We actually use a simpler model.
Three state HMM is the sweet spot for regime work. The real challenge is persistence; daily transition probabilities decay fast. Do you smooth them?
No. We actually use a simpler model.