How the use of Markov-Switching Sharpe Ratio can improve Mexican Pension Funds Investment Decisions

owards the end of the 20th century, as part of the encompassing structural reforms that modernized the Mexican economy after decades of an obsolete imports-substitution model, overregulated economic sectors, and state-controlled productive sectors, the creation of an individual savings account pension system to replace the “pay-as-you-go” anachronic pension system prevalent since 1943, was necessary given the country’s demographic trends. The analysis presented in this paper uses a Markov-switching model to obtain the Sharpe ratio of different SIEFOREs portfolios for different subperiods and volatility regimes (normal and crisis). The results confirm that not all SIEFOREs are good (or bad) performers all the time. This evidence suggests that awareness of market conditions conveys information that can support rational decisions about when to change savings from SIEFOREs that are good performers  during normal times to good performers during crisis periods. While these are preliminary findings, they represent a stating point for further analyses that should contribute to improved savers'decisions.