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Large Drawdowns and Long-Term Asset Management

Author

Listed:
  • Eric Jondeau

    (Faculty of Business and Economics (HEC Lausanne), Swiss Finance Institute and CEPR, University of Lausanne, CH 1015 Lausanne, Switzerland
    The authors contributed equally to this work.)

  • Alexandre Pauli

    (Ecole Polytechnique Fédérale de Lausanne, Route Cantonale, CH 1015 Lausanne, Switzerland
    The authors contributed equally to this work.)

Abstract
Long-term investors are often hesitant to invest in assets or strategies prone to significant drawdowns, primarily due to the challenge of predicting these drawdowns. This study presents a multivariate Markov-switching model for small- and large-cap returns in the U.S. equity markets, demonstrating that three distinct regimes are necessary to capture the negative trends in expected returns during financial crises. Our findings indicate that this framework enhances the prediction of conditional drawdowns compared to standard alternative models of financial returns. Furthermore, out-of-sample analysis shows that investment strategies based on these predictions outperform those relying on models with one or two regimes.

Suggested Citation

  • Eric Jondeau & Alexandre Pauli, 2024. "Large Drawdowns and Long-Term Asset Management," JRFM, MDPI, vol. 17(12), pages 1-29, December.
    • Handle: RePEc:gam:jjrfmx:v:17:y:2024:i:12:p:552-:d:1540099
    as

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