This paper proposes a framework to detect financial crises, pinpoint the end of a crisis in stock markets and support investment decision-making processes. This proposal is based on a hidden Markov model (HMM) and allows for a specific focus on conditional mean returns. By analysing weekly changes in the US stock market indexes over a period of 20 years, this study obtains an accurate detection of stable and turmoil periods and a probabilistic measure of switching between different stock market conditions. The results contribute to the discussion of the capabilities of Markov-switching models of analysing stock market behaviour. In particular, we find evidence that HMM outperforms threshold GARCH model with Student-t innovations both in-sample and out-of-sample, giving financial operators some appealing investment strategies.
A dynamic analysis of stock markets using a hidden Markov model / L. De Angelis; L.J. Paas. - In: JOURNAL OF APPLIED STATISTICS. - ISSN 0266-4763. - STAMPA. - 40:8(2013), pp. 1682-1700. [10.1080/02664763.2013.793302]
A dynamic analysis of stock markets using a hidden Markov model
DE ANGELIS, LUCA;
2013
Abstract
This paper proposes a framework to detect financial crises, pinpoint the end of a crisis in stock markets and support investment decision-making processes. This proposal is based on a hidden Markov model (HMM) and allows for a specific focus on conditional mean returns. By analysing weekly changes in the US stock market indexes over a period of 20 years, this study obtains an accurate detection of stable and turmoil periods and a probabilistic measure of switching between different stock market conditions. The results contribute to the discussion of the capabilities of Markov-switching models of analysing stock market behaviour. In particular, we find evidence that HMM outperforms threshold GARCH model with Student-t innovations both in-sample and out-of-sample, giving financial operators some appealing investment strategies.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.