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Regime switching models have been assuming a central role in financial applications because of their well-known ability to capture the presence of rich non-linear patterns in the joint distribution of asset returns. This paper examines how the presence of regimes in means, variances, and correlations of asset returns translates into explicit dynamics of the Markowitz mean-variance frontier. In particular, the paper shows both theoretically and through an application to international equity portfolio diversification that substantial differences exist between bull and bear regime-specific frontiers, both in statistical and in economic terms.
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