The Shock Doctrine of Portfolio Optimization
TL;DR for operators Shi and Xu’s paper asks a deceptively simple question: what if a market regime change is not just a new label on the same price process, but a price shock in its own right?1 That matters because many portfolio systems treat regimes as parameter containers. In regime 1, volatility is low, drift is healthy, jump intensity is manageable. In regime 2, the numbers change. The model switches shelves, picks a new parameter set, and carries on. Fine, as far as it goes. The market, being less polite than the model, often gaps before anyone has finished updating the spreadsheet. ...