Department of Economics and Business Economics

A Duration Hidden Markov Model for the Identification of Regimes in Stock Market Returns

Research output: Working paperResearch

Documents

  • Rp10 51

    Final published version, 520 KB, PDF document

  • Christos Ntantamis, Denmark
  • School of Economics and Management
This paper introduces a Duration Hidden Markov Model to model bull and bear market regime switches in the stock market; the duration of each state of the Markov Chain is a random variable that depends on a set of exogenous variables. The model not only allows the endogenous determination of the different regimes and but also estimates the effect of the explanatory variables on the regimes' durations. The model is estimated here on NYSE returns using the short-term interest rate and the interest rate spread as exogenous variables. The bull market regime is assigned to the identified state with the higher mean and lower variance; bull market duration is found to be negatively dependent on short-term interest rates and positively on the interest rate spread, while bear market duration depends positively the short-term interest rate and negatively on the interest rate spread.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages26
Publication statusPublished - 2010

    Research areas

  • Hidden Markov Model, Variable-dependent regime duration, Regime Switching, Interest rate effect

See relations at Aarhus University Citationformats

Download statistics

No data available

ID: 21775777