I'm always wondering whether anyone has utilized regime-switching models successfully in live trading.

Academia has long discussed this topic in-depth, such as using Regime Switching models for detection of abrupt market dislocation or structural changes. Popular techniques include modeling the underlying process as a Markov Process with certain distributions, and use such model to estimate the transition probability matrix.

The premise of this approach is attractive: if we can apply different approaches based on different market regimes, then the modeling process can better reflect the reality. However, like any other model, the reliability of such model is not convincing.

Personally, I've tried implementing some Regime-switch models proposed by academics and test their explanatory power for detecting market shifts (such as shift of cycles, volatility levels, etc), but the results are always disappointing.

Can any fellow friends here share your opinions? Cheers.

I'm always wondering whether anyone has utilized regime-switching models successfully in forecasting or trading.

Academia has long discussed this topic in-depth, such as using Regime Switching models for detection of abrupt market dislocation or structural changes. Popular techniques include modeling the underlying process as a Markov Process with certain distributions, and use such model to estimate the transition probability matrix.

The premise of this approach is attractive: if we can apply different approaches based on different market regimes, then the modeling process can better reflect the reality. However, like any other model, the reliability of such model is not convincing.

Personally, I've tried implementing some Regime-switch models proposed by academics and test their explanatory power for detecting market shifts (such as shift of cycles, volatility levels, etc), but the results are always disappointing.

Can any fellow friends here share your opinions? Cheers.