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Asset rotation strategy based on regime shifts

Nov 30, 2024 by Christoph Mark

TODO: show results from last post

From the fit of the probabilistic CAPM model, we have obtained the joint distribution of α\alpha and β\beta for each trading week. Based on these distributions, we now want to build trading indicators that we can subsequently use to build a simple trading strategy. The "probabilistic attractiveness" of a financial asset can be summarized as follows: investors want to be certain that the asset has positive alpha (to generate excess returns), and they want to be certain that the asset has negative beta (to diversify from the market). Based on the distributions we have obtained, we can directly compute the probability that alpha is positive, p(α>0)p(\alpha>0) and the probability that beta is negative p(β)<0p(\beta) < 0:

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