What you will learn
- Trend
- Volatility
- Liquidity
- Macro context
Trend
A regime is a defined condition used to organize observations, such as high versus low measured variation. It is a modeling choice, not a directly observed permanent market identity. State the variables and thresholds used.
Volatility
Definitions must use information available at the decision time. Labelling a period trending because its later full-period return was large cannot support a decision at the period's start.
Liquidity
Regime duration and transition rules determine how quickly labels can change. Very responsive labels may switch often; slow labels can lag important changes. Evaluate the trade-off rather than assuming more stable labels are always better.
Macro context
The purpose of a regime definition should be explicit: description, risk control or strategy selection. A classification useful for explaining history may not improve a prospective trading decision.
Worked example
A month is labelled high volatility using its final realized volatility. That label is useful descriptively, but it was not known on the first trading day unless a separate forecast produced it then.
Try it yourself
Rewrite the label as a decision-time rule using only a trailing window, and state what changes in the experiment.
Show the worked solution
The new rule classifies using past observations and has a known calculation time. It predicts or proxies current conditions rather than identifying the completed month's outcome. Its errors and delays must be evaluated.
Apply this to your course project
Evaluate a fixed regime policy without hindsight relabelling.
Keep the calculation inputs, assumptions and decisions with your work. Practical exercises are self-reviewed; the scored knowledge checks assess the questions shown, not an independent certification of practical competence.