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Title:

Regime-Switching Dynamic Correlation Models

Version:

1.1-2

Description:

Estimation, forecasting, simulation, and portfolio construction for regime-switching models with exogenous variables as in Pelletier (2006) <doi:10.1016/j.jeconom.2005.01.013>.

License:

GPL-3

Encoding:

UTF-8

RoxygenNote:

7.3.2

URL:

https://github.com/ArdiaD/RSDC

BugReports:

https://github.com/ArdiaD/RSDC/issues

Imports:

Rdpack (≥ 2.0), DEoptim, mvtnorm, stats, utils

Suggests:

knitr, rmarkdown, testthat (≥ 3.0.0), quadprog, Rsolnp

Config/testthat/edition:

RdMacros:

Rdpack

Depends:

R (≥ 3.5)

LazyData:

true

NeedsCompilation:

Packaged:

2025-08-28 18:40:15 UTC; ardiad

Author:

David Ardia

[aut, cre], Benjamin Seguin [aut]

Maintainer:

David Ardia <david.ardia.ch@gmail.com>

Repository:

CRAN

Date/Publication:

2025-09-03 08:00:24 UTC

RSDC: Regime-Switching Correlation Models for Portfolio Analysis

Description

The RSDC package provides a comprehensive framework for modeling, estimating, and forecasting correlation structures in multivariate time series under regime-switching dynamics. It supports both fixed transition probabilities and time-varying transition probabilities (TVTP) driven by exogenous variables.

The methodology is particularly suited to empirical asset pricing and portfolio management applications, enabling users to incorporate macroeconomic, financial, or climate-related predictors into the regime dynamics. The package integrates the full workflow — from model estimation to covariance matrix reconstruction and portfolio optimization — in a single, reproducible pipeline.

Main Features

Model estimation and filtering: rsdc_hamilton (Hamilton filter), rsdc_likelihood (likelihood computation), rsdc_estimate (parameter estimation).
Correlation and covariance forecasting: rsdc_forecast.
Portfolio construction: rsdc_minvar (minimum-variance portfolios), rsdc_maxdiv (maximum-diversification portfolios).
Simulation: rsdc_simulate (simulate TVTP regime-switching series).

Authors

David Ardia and Benjamin Seguin

References

Engle RF (2002). “Dynamic conditional correlation: A simple class of multivariate generalized autoregressive conditional heteroskedasticity models.” Journal of Business & Economic Statistics, 20(3), 339–350. doi:10.1198/073500102288618487.

Hamilton JD (1989). “A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle.” Econometrica, 57(2), 357–384. doi:10.2307/1912559.

Pelletier D (2006). “Regime switching for dynamic correlations.” Journal of Econometrics, 131(1-2), 445–473. doi:10.1016/j.jeconom.2005.01.004.

Green vs Brown portfolio dataset

Description

Daily returns for a green and a brown portfolios constructed following the equal-weighted 10-90 percentile approach.

Usage

data(greenbrown)

Format

A data frame with 2266 rows and three columns:

DATE: Dates ranging from 2014-01-02 to 2024-12-30.
return_green: Numeric returns for the green portfolio.
return_brown: Numeric returns for the brown portfolio.

Source

Originally data in inst/extdata/green-brown-ptf.xlsx.

Examples

data("greenbrown")
str(greenbrown)
head(greenbrown)

Estimate Regime-Switching or Constant Correlation Model (Wrapper)

Description

Unified front-end that dispatches to one of three estimators:

f_optim() — TVTP specification (method = "tvtp").
f_optim_noX() — fixed transition matrix (method = "noX").
f_optim_const() — constant correlation, single regime (method = "const").

Usage

rsdc_estimate(
  method = c("tvtp", "noX", "const"),
  residuals,
  N = 2,
  X = NULL,
  out_of_sample = FALSE,
  control = list()
)

Arguments

method

Character. One of "tvtp", "noX", "const".

residuals

Numeric matrix T \times K. Typically standardized residuals/returns.

N

Integer. Number of regimes. Ignored when method = "const".

X

Numeric matrix T \times p of exogenous covariates (required for "tvtp").

out_of_sample

Logical. If TRUE, a fixed 70/30 split is applied prior to estimation.

control

Optional list. Currently forwards do_trace = FALSE and seed = 123 to the backends.

Details

Method selection: match.arg() validates method.
Inputs: "tvtp" requires non-NULL X; N is ignored for "const".
Split: If out_of_sample = TRUE, the first 70\

Value

transition_matrix: Estimated transition matrix (1 \times 1 for "const").
correlations: Regime lower-triangular correlations.
covariances: Array of full correlation matrices.
log_likelihood: Maximized log-likelihood.
beta: TVTP coefficients (only for "tvtp").

References

Mullen K, Ardia D, Gil D, Windover D, Ulrich J (2011). “DEoptim: An R Package for Global Optimization by Differential Evolution.” Journal of Statistical Software, 40(6), 1–26. doi:10.18637/jss.v040.i06.

Hamilton JD (1989). “A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle.” Econometrica, 57(2), 357–384. doi:10.2307/1912559.

Pelletier D (2006). “Regime switching for dynamic correlations.” Journal of Econometrics, 131(1-2), 445–473. doi:10.1016/j.jeconom.2005.01.004.

Examples


y <- scale(matrix(rnorm(100 * 3), 100, 3))
rsdc_estimate("const", residuals = y)
rsdc_estimate("noX", residuals = y, N = 2)
X <- cbind(1, scale(seq_len(nrow(y))))
rsdc_estimate("tvtp", residuals = y, N = 2, X = X)

Forecast Covariance/Correlation Paths from an RSDC Model

Description

Generates per-period correlation and covariance matrices from a fitted model: "const" (constant correlation), "noX" (fixed transition matrix), or "tvtp" (time-varying transition probabilities).

Usage

rsdc_forecast(
  method = c("tvtp", "noX", "const"),
  N,
  residuals,
  X = NULL,
  final_params,
  sigma_matrix,
  value_cols,
  out_of_sample = FALSE,
  control = list()
)

Arguments

method

Character. One of "tvtp", "noX", "const".

N

Integer. Number of regimes (ignored for "const").

residuals

Numeric matrix T \times K used to compute correlations or run the filter.

X

Optional numeric matrix T \times p (required for "tvtp").

final_params

List with fitted parameters (e.g., from rsdc_estimate): must include correlations, and either transition_matrix ("noX") or beta ("tvtp"); include log_likelihood for BIC computation.

sigma_matrix

Numeric matrix T \times K of forecasted standard deviations.

value_cols

Character/integer vector of columns in sigma_matrix that define asset order.

out_of_sample

Logical. If TRUE, use a fixed 70/30 split; otherwise use the whole sample.

control

Optional list; supports threshold (in (0,1), default 0.7).

Details

Forecast horizon: If out_of_sample = TRUE, filter on the first threshold fraction and forecast on the remainder.
Correlation paths:
- "const" — empirical correlation of residuals, repeated across time.
- "noX"/"tvtp" — smoothed-probability weighted average of regime correlations.
Covariance build: Reconstruct R_t from the pairwise vector (columns ordered by combn(K, 2)), set D_t = \mathrm{diag}(\sigma_{t,1},\dots,\sigma_{t,K}), and \Sigma_t = D_t R_t D_t.
BIC: Parameter count k is N * ncol(X) + N * K * (K - 1) / 2 for "tvtp", N * (N - 1) + N * K * (K - 1) / 2 for "noX", and K * (K - 1) / 2 for "const".

Value

smoothed_probs: N \times T^\ast smoothed probabilities ("noX"/"tvtp" only).
sigma_matrix: T^\ast \times K slice aligned to the forecast horizon.
cov_matrices: List of K \times K covariance matrices \Sigma_t = D_t R_t D_t.
predicted_correlations: T^\ast \times \binom{K}{2} pairwise correlations in combn(K, 2) order.
BIC: Bayesian Information Criterion \mathrm{BIC} = \log(n)\,k - 2\,\ell.
y: T^\ast \times K residual matrix aligned to the forecast horizon.

Examples

set.seed(123)
T <- 60; K <- 3; N <- 2
y <- scale(matrix(rnorm(T*K), T, K))
vols <- matrix(0.2 + 0.05*abs(sin(seq_len(T)/7)), T, K)
rho <- rbind(c(0.10, 0.05, 0.00), c(0.60, 0.40, 0.30))
Pfix <- matrix(c(0.9, 0.1, 0.2, 0.8), 2, 2, byrow = TRUE)
rsdc_forecast("noX", N, y, NULL,
              list(correlations = rho, transition_matrix = Pfix, log_likelihood = -200),
              vols, 1:K)

Hamilton Filter (Fixed P or TVTP)

Description

Runs the Hamilton (1989) filter for a multivariate regime-switching correlation model. Supports either a fixed (time-invariant) transition matrix P or time-varying transition probabilities (TVTP) built from exogenous covariates X via a logistic link. Returns filtered/smoothed regime probabilities and the log-likelihood.

Usage

rsdc_hamilton(y, X = NULL, beta = NULL, rho_matrix, K, N, P = NULL)

Arguments

y

Numeric matrix T \times K of observations (e.g., standardized residuals/returns). Columns are treated as mean-zero with unit variance; only the correlation structure is modeled.

X

Optional numeric matrix T \times p of covariates for TVTP. Required if beta is supplied.

beta

Optional numeric matrix N \times p. TVTP coefficients; row i governs persistence of regime i via plogis(X[t, ] %*% beta[i, ]).

rho_matrix

Numeric matrix N \times C of regime correlation parameters, where C = K(K-1)/2. Each row is the lower-triangular part (by lower.tri) of a regime's correlation matrix.

K

Integer. Number of observed series (columns of y).

N

Integer. Number of regimes.

P

Optional N \times N fixed transition matrix. Used only when X or beta is NULL.

Details

Correlation rebuild: For regime m, a correlation matrix R_m is reconstructed from rho_matrix[m, ] (lower-triangular fill + symmetrization). Non-PD proposals are penalized.
Transition dynamics:
- Fixed P: If X or beta is missing, a constant P is used (user-provided via P; otherwise uniform 1/N rows).
- TVTP: With X and beta, diagonal entries use plogis(X[t, ] %*% beta[i, ]). Off-diagonals are equal and sum to 1 - p_{ii,t}. For N=1, P_t = [1].
Numerical safeguards: A small ridge is added before inversion; if filtering degenerates at a time step, log_likelihood = -Inf is returned.

Value

A list with:

filtered_probs: N \times T matrix of filtered probabilities \Pr(S_t = j \mid \Omega_t).
smoothed_probs: N \times T matrix of smoothed probabilities \Pr(S_t = j \mid \Omega_T).
log_likelihood: Scalar log-likelihood of the model given y.

Note

TVTP uses a logistic link on the diagonal; off-diagonals are equal by construction.

References

Hamilton JD (1989). “A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle.” Econometrica, 57(2), 357–384. doi:10.2307/1912559.

Examples

set.seed(1)
T <- 50; K <- 3; N <- 2
y <- scale(matrix(rnorm(T * K), T, K), center = TRUE, scale = TRUE)

# Example rho: two regimes with different average correlations
rho <- rbind(c(0.10, 0.05, 0.00),
             c(0.60, 0.40, 0.30))  # lower-tri order for K=3

# Fixed-P filtering
Pfix <- matrix(c(0.9, 0.1,
                 0.2, 0.8), nrow = 2, byrow = TRUE)
out_fix <- rsdc_hamilton(y = y, X = NULL, beta = NULL,
                         rho_matrix = rho, K = K, N = N, P = Pfix)
str(out_fix$filtered_probs)

# TVTP filtering (include an intercept yourself)
X <- cbind(1, scale(seq_len(T)))
beta <- rbind(c(1.2, 0.0),
              c(0.8, -0.1))
out_tvtp <- rsdc_hamilton(y = y, X = X, beta = beta,
                          rho_matrix = rho, K = K, N = N)
out_tvtp$log_likelihood

Negative Log-Likelihood for Regime-Switching Correlation Models

Description

Computes the negative log-likelihood for a multivariate correlation-only regime-switching model, with either a fixed (time-invariant) transition matrix or time-varying transition probabilities (TVTP) driven by exogenous covariates. Likelihood evaluation uses the Hamilton (1989) filter.

Usage

rsdc_likelihood(params, y, exog = NULL, K, N)

Arguments

params

Numeric vector of model parameters packed as:

No exogenous covariates (exog = NULL): first N(N-1) transition parameters (for the fixed transition matrix), followed by N \times K(K-1)/2 correlation parameters, stacked row-wise by regime in lower.tri order.
With exogenous covariates (exog provided): first N \times p TVTP coefficients (beta, row i corresponds to regime i), followed by N \times K(K-1)/2 correlation parameters, stacked row-wise by regime in lower.tri order.

y

Numeric matrix T \times K of observations (e.g., standardized residuals). Columns are treated as mean-zero, unit-variance; only correlation is modeled.

exog

Optional numeric matrix T \times p of exogenous covariates. If supplied, a TVTP specification is used.

K

Integer. Number of observed series (columns of y).

N

Integer. Number of regimes.

Details

Transition dynamics:
- Fixed P (no exog): params begins with transition parameters. For N=2, the implementation maps them to P=\begin{pmatrix} p_{11} & 1-p_{11}\\ 1-p_{22} & p_{22}\end{pmatrix}.
- TVTP: with exog, diagonal persistence is p_{ii,t} = \mathrm{logit}^{-1}(X_t^\top \beta_i); off-diagonals are equal and sum to 1-p_{ii,t}.
Correlation build: per regime, the lower-triangular vector is filled into a symmetric correlation matrix. Non-positive-definite proposals or |\rho|\ge 1 are penalized via a large objective value.
Evaluation: delegates to rsdc_hamilton; if the filter returns log_likelihood = -Inf, a large penalty is returned.

Value

Numeric scalar: the negative log-likelihood to be minimized by an optimizer.

Note

The function is written for use inside optimizers; it performs inexpensive validation and returns large penalties for invalid parameterizations instead of stopping with errors.

Examples

# Small toy example (N = 2, K = 3), fixed P (no exog)
set.seed(1)
T <- 40; K <- 3; N <- 2
y <- scale(matrix(rnorm(T * K), T, K), center = TRUE, scale = TRUE)

# Pack parameters: trans (p11, p22), then rho by regime (lower-tri order)
p11 <- 0.9; p22 <- 0.8
rho1 <- c(0.10, 0.05, 0.00)  # (2,1), (3,1), (3,2)
rho2 <- c(0.60, 0.40, 0.30)
params <- c(p11, p22, rho1, rho2)

nll <- rsdc_likelihood(params, y = y, exog = NULL, K = K, N = N)
nll

# TVTP example: add X and beta (pack beta row-wise, then rho)
X <- cbind(1, scale(seq_len(T)))
beta <- rbind(c(1.2, 0.0),
              c(0.8, -0.1))
params_tvtp <- c(as.vector(t(beta)), rho1, rho2)
nll_tvtp <- rsdc_likelihood(params_tvtp, y = y, exog = X, K = K, N = N)
nll_tvtp

Maximum-Diversification Portfolio (Rolling Weights)

Description

Computes rolling maximum-diversification (MaxDiv) portfolio weights from a sequence of per-period covariance matrices implied by forecasted volatilities and correlations. Falls back to equal weights if the nonlinear solver fails.

Usage

rsdc_maxdiv(sigma_matrix, value_cols, predicted_corr, y, long_only = TRUE)

Arguments

sigma_matrix

Numeric matrix T \times K of forecasted standard deviations.

value_cols

Character/integer vector naming columns in sigma_matrix (asset order).

predicted_corr

Numeric matrix T \times \binom{K}{2} of pairwise correlations in combn(K, 2) column order.

y

Numeric matrix T \times K of asset returns (for realized stats).

long_only

Logical. If TRUE, impose w \ge 0 and \sum_i w_i = 1; otherwise bounds are -1 \le w_i \le 1 with \sum_i w_i = 1.

Details

Covariance build: For each t, reconstruct R_t from the pairwise vector; set D_t=\mathrm{diag}(\sigma_{t,1},\dots,\sigma_{t,K}) and \Sigma_t = D_t R_t D_t.
Objective (MaxDiv): maximize \mathrm{DR}(w) = \frac{\sum_i w_i \sigma_{t,i}}{\sqrt{w^\top \Sigma_t w}} subject to \sum_i w_i = 1 and bounds on w. Implemented by minimizing the negative ratio.
Solver: Rsolnp::solnp with equality \sum_i w_i = 1 and bounds by long_only; on error, weights default to 1/K.

Value

weights: T \times K matrix of weights.
returns: Vector of realized portfolio returns sum(y[t,] * weights[t,]).
diversification_ratios: Vector of realized diversification ratios.
mean_diversification: Average diversification ratio.
K: Number of assets.
assets: Asset names.
volatility: Standard deviation of realized portfolio returns.

Examples

# Toy example with K = 3
if (requireNamespace("Rsolnp", quietly = TRUE)) {
  T <- 50; K <- 3
  set.seed(42)
  vols <- matrix(0.2 + 0.05*abs(sin(seq_len(T)/7)), T, K)
  colnames(vols) <- paste0("A", 1:K)
  # simple, stationary correlations (order: (2,1), (3,1), (3,2))
  pred_corr <- cbind(rep(0.20, T), rep(0.10, T), rep(0.05, T))
  rets <- matrix(rnorm(T*K, sd = 0.01), T, K); colnames(rets) <- colnames(vols)

  mx <- rsdc_maxdiv(sigma_matrix   = vols,
                    value_cols     = colnames(vols),
                    predicted_corr = pred_corr,
                    y              = rets,
                    long_only      = TRUE)
  head(mx$weights)
  mx$mean_diversification
}

Minimum-Variance Portfolio (Rolling Weights)

Description

Computes rolling minimum-variance (MV) portfolio weights from a sequence of per-period covariance matrices implied by forecasted volatilities and pairwise correlations. Supports long-only or unconstrained MV. If the QP solver fails at a time step, the routine falls back to equal weights.

Usage

rsdc_minvar(sigma_matrix, value_cols, predicted_corr, y, long_only = TRUE)

Arguments

sigma_matrix

Numeric matrix T \times K of forecasted volatilities (standard deviations), one column per asset.

value_cols

Character or integer vector giving the columns in sigma_matrix to use as assets (order defines the asset order).

predicted_corr

Numeric matrix T \times P of pairwise correlations, where P = \binom{K}{2} and the columns correspond to combn(K, 2) order.

y

Numeric matrix T \times K of asset returns aligned with sigma_matrix. Used only to compute the realized portfolio volatility.

long_only

Logical. If TRUE (default), imposes long-only MV with the full-investment constraint \sum_i w_i = 1 and w_i \ge 0. If FALSE, solves unconstrained MV with only \sum_i w_i = 1.

Details

Covariance build: For each t, a correlation matrix R_t is reconstructed ... Let D_t = \mathrm{diag}(\sigma_{t,1},\dots,\sigma_{t,K}) and \Sigma_t = D_t R_t D_t.
Optimization: Minimize \tfrac{1}{2} w^\top \Sigma_t w subject to \mathbf{1}^\top w = 1 and, if long_only, w \ge 0 (solved with quadprog::solve.QP).
Failure handling: If the QP fails at time \(t\), weights default to equal allocation \(w_i = 1/K\).

Value

An object of class "minvar_portfolio":

weights: T \times K matrix of MV weights (one row per time).
cov_matrices: List of length T with the per-period K \times K covariance matrices.
volatility: Realized standard deviation of portfolio returns (see Note on units).
y: The input y matrix (coerced to T \times K).
K: Number of assets.

Note on units

The realized portfolio return at time \(t\) is computed as sum(y[t, ] * weights[t, ]) / 100. This assumes y is expressed in \ remove the / 100 in the implementation or convert inputs accordingly.

Examples

# Toy example with K = 3
T <- 50; K <- 3
set.seed(42)
vols <- matrix(0.2 + 0.05*abs(sin(seq_len(T)/7)), T, K)
colnames(vols) <- paste0("A", 1:K)
# simple, stationary correlations
pred_corr <- cbind(rep(0.20, T), rep(0.10, T), rep(0.05, T))  # order: (2,1), (3,1), (3,2)
rets <- matrix(rnorm(T*K, sd = 0.01), T, K); colnames(rets) <- colnames(vols)

mv <- rsdc_minvar(sigma_matrix  = vols,
                  value_cols    = colnames(vols),
                  predicted_corr= pred_corr,
                  y             = rets,
                  long_only     = TRUE)
head(mv$weights)
mv$volatility

Simulate Multivariate Regime-Switching Data (TVTP)

Description

Simulates a multivariate time series from a regime-switching model with time-varying transition probabilities (TVTP) driven by covariates X. Transition probabilities are generated via a multinomial logistic (softmax) link; observations are drawn from regime-specific Gaussian distributions.

Usage

rsdc_simulate(n, X, beta, mu, sigma, N, seed = NULL)

Arguments

n

Integer. Number of time steps to simulate.

X

Numeric matrix n \times p of covariates used to form the transition probabilities. Row X[t, ] corresponds to covariates available at time t. Only rows 1:(n-1) are used to transition from t-1 to t.

beta

Numeric array N \times N \times p. Softmax coefficients for the multinomial transition model; beta[i, j, ] parameterizes the transition from state i to state j.

mu

Numeric matrix N \times K. Regime-specific mean vectors.

sigma

Numeric array K \times K \times N. Regime-specific covariance (here, correlation/variance) matrices; each K \times K slice must be symmetric positive definite.

N

Integer. Number of regimes.

seed

Optional integer. If supplied, sets the RNG seed for reproducibility.

Details

Initial state and first draw: The initial regime S_1 is sampled uniformly; the first observation y_1 is drawn from \mathcal{N}(\mu_{S_1}, \Sigma_{S_1}).
TVTP via softmax: For t \ge 2, the row i of P_t is

P_t(i, j) = \frac{\exp\!\big(X_{t-1}^\top \beta_{i,j}\big)} {\sum_{h=1}^N \exp\!\big(X_{t-1}^\top \beta_{i,h}\big)}\,,

computed with log-sum-exp stabilization.
Sampling: Given S_{t-1}, draw S_t from the categorical distribution with probabilities P_t(S_{t-1}, \cdot) and y_t \sim \mathcal{N}(\mu_{S_t}, \Sigma_{S_t}).

Value

A list with:

states: Integer vector of length n; the simulated regime index at each time.
observations: Numeric matrix n \times K; the simulated observations.
transition_matrices: Array N \times N \times n; the transition matrix P_t used at each time step (with P_1 undefined by construction; see Details).

Note

Requires mvtnorm for multivariate normal sampling (called as mvtnorm::rmvnorm).

Examples

set.seed(123)
n <- 200; K <- 3; N <- 2; p <- 2
X <- cbind(1, scale(seq_len(n)))

beta <- array(0, dim = c(N, N, p))
beta[1, 1, ] <- c(1.2,  0.0)
beta[2, 2, ] <- c(1.0, -0.1)

mu <- rbind(c(0, 0, 0),
            c(0, 0, 0))
rho <- rbind(c(0.10, 0.05, 0.00),
             c(0.60, 0.40, 0.30))
Sig <- array(0, dim = c(K, K, N))
for (m in 1:N) {
  R <- diag(K); R[lower.tri(R)] <- rho[m, ]; R[upper.tri(R)] <- t(R)[upper.tri(R)]
  Sig[, , m] <- R
}
sim <- rsdc_simulate(n = n, X = X, beta = beta, mu = mu, sigma = Sig, N = N, seed = 99)

RSDC: Regime-Switching Correlation Models for Portfolio Analysis

Description

Main Features

Authors

References

Green vs Brown portfolio dataset

Description

Usage

Format

Source

Examples

Estimate Regime-Switching or Constant Correlation Model (Wrapper)

Description

Usage

Arguments

Details

Value

References

See Also

Examples

Forecast Covariance/Correlation Paths from an RSDC Model

Description

Usage

Arguments

Details

Value

See Also

Examples

Hamilton Filter (Fixed P or TVTP)

Description

Usage

Arguments

Details

Value

Note

References

See Also

Examples

Negative Log-Likelihood for Regime-Switching Correlation Models

Description

Usage

Arguments

Details

Value

Note

See Also

Examples

Maximum-Diversification Portfolio (Rolling Weights)

Description

Usage

Arguments

Details

Value

See Also

Examples

Minimum-Variance Portfolio (Rolling Weights)

Description

Usage

Arguments

Details

Value

Note on units

See Also

Examples

Simulate Multivariate Regime-Switching Data (TVTP)

Description

Usage

Arguments

Details

Value

Note

See Also

Examples