Regimes

We propose a new systematic method for detecting the current economic regime and show how to use this information for predicting returns. Rather than presupposing a set of possible regimes, we rely on economic state variables and determine at which historical dates the values of these variables were most similar. To establish our position in an asset today, we identify historically similar periods and measure subsequent performance of the asset. If the historical performance is positive, we initiate a long position; conversely, if it is negative, we initiate a short position. We illustrate the efficacy of our method on six common long–short equity factors over 1985–2024. Our results show that our regime classification leads to significant outperformance. Interestingly, we also find important information in what we call anti-regimes—periods in the past that are the most dissimilar to today.

Duke Scholars

Author Campbell R. Harvey Fuqua School of Business