demo/regime_switching.R

In PortfolioAnalytics: Portfolio Analysis, Including Numerical Methods for Optimization of Portfolios

#' ---
#' title: "Regime Switching Demo"
#' author: Ross Bennett
#' date: "7/17/2014"
#' ---

#' Load package and data.
library(PortfolioAnalytics)
data(edhec)
R <- edhec[,1:6]
colnames(R) <- c("CA", "CTAG", "DS", "EM", "EMN", "ED")
funds <- colnames(R)

#' Create an xts object of regimes.
#' Here I just randomly samples values to create regime 1 or regime 2. In 
#' practice, this could based on volatility or other regime switching models
set.seed(123)
regime <- xts(sample(1:2, nrow(R), replace=TRUE, prob=c(0.3, 0.7)), index(R))

#' Construct portfolio for regime 1.
port1 <- portfolio.spec(funds)
port1 <- add.constraint(port1, "weight_sum", min_sum=0.99, max_sum=1.01)
port1 <- add.constraint(port1, "box", min=0.1, max=0.5)
port1 <- add.objective(port1, type="risk", name="ES", arguments=list(p=0.9))
port1 <- add.objective(port1, type="risk_budget", name="ES", 
                       arguments=list(p=0.9), max_prisk=0.5)

#' Construct portfolio for regime 2.
port2 <- portfolio.spec(funds)
port2 <- add.constraint(port2, "weight_sum", min_sum=0.99, max_sum=1.01)
port2 <- add.constraint(port2, "box", min=0, max=0.6)
port2 <- add.objective(port2, type="risk", name="StdDev")
port2 <- add.objective(port2, type="risk_budget", name="StdDev", max_prisk=0.5)

#' Combine the portfolios.
portfolios <- combine.portfolios(list(port1, port2))

#' Now we construct the regime model and corresponding portfolios to use for
#' each regime.
regime.port <- regime.portfolios(regime, portfolios)
regime.port

#' This optimization should result in out portfolio for regime 2.
opt1 <- optimize.portfolio(R, regime.port, 
                           optimize_method="random", 
                           search_size=2000, 
                           trace=TRUE)
opt1
opt1$regime

#' This optimization should result in out portfolio for regime 1.
opt2 <- optimize.portfolio(R[1:(nrow(R)-1)], regime.port, 
                           optimize_method="DEoptim", 
                           search_size=2000, 
                           trace=TRUE)
opt2
opt2$regime

#' Run optimization with rebalancing using our regime switching portfolio.
opt.rebal <- optimize.portfolio.rebalancing(R, regime.port,
                                            optimize_method="random", 
                                            rebalance_on="quarters", 
                                            training_period=130,
                                            search_size=2000, 
                                            trace=TRUE)

#' The print and summary methods work the same as they do for optimizations 
#' without regime switching.
opt.rebal
summary(opt.rebal)

#' We can extract which regime portfolio we optimized with at each rebalance date.
lapply(opt.rebal$opt_rebalancing, function(x) x$regime)

#' Extract the optimal weights at each rebalance date.
wt <- extractWeights(opt.rebal)
wt

#' Extract the objective measures*.
obj <- extractObjectiveMeasures(opt.rebal)
str(obj)
obj

# Extract the stats*.
xt <- extractStats(opt.rebal)
str(xt)

#' *
#' Note that this returns a list of N elements for N regimes. We may have 
#' different objectives and/or a different number of objectives which makes
#' returning a single xts object difficult/

#' Extract the optimal weights at each rebalance date.
chart.Weights(opt.rebal, colorset=bluemono)

#' Chart the risk contribution for regime 1
chart.RiskBudget(opt.rebal, match.col="ES", risk.type="percentage", 
                 regime=1, colorset=bluemono)

#' Chart the risk contribution for regime 2
chart.RiskBudget(opt.rebal, match.col="StdDev", risk.type="percentage", 
                 regime=2, colorset=bluemono)