The relation between fundamentals and asset returns is analyzed by means of Markov-switching regression models with time-varying transition probabilities. By referring to the Italian Stock Exchange over the 1973-2002 period, we find that (i) returns 'switch' between a zero-expected return/low volatility state and a high expected return/high volatility state; (ii) states are persistent and hence state changes can be forecast to some extent; (iii) the probability of state changes can be explained in terms of changes in the fundamentals; (iv) fundamentals do not have a direct impact on the expected returns but they only affect the transition probability matrix. Overall, our results show that a non-linear relation between market price changes and market fundamentals can be caught within the framework of (Markov) switching regession models. © Springer-Verlag 2003.

Gardini A., Cavaliere G., Costa M. (2003). Fundamentals and asset price dynamics. STATISTICAL METHODS & APPLICATIONS, 12(2), 211-226 [10.1007/s10260-003-0053-3].

Fundamentals and asset price dynamics

Gardini A.;Cavaliere G.;Costa M.
2003

Abstract

The relation between fundamentals and asset returns is analyzed by means of Markov-switching regression models with time-varying transition probabilities. By referring to the Italian Stock Exchange over the 1973-2002 period, we find that (i) returns 'switch' between a zero-expected return/low volatility state and a high expected return/high volatility state; (ii) states are persistent and hence state changes can be forecast to some extent; (iii) the probability of state changes can be explained in terms of changes in the fundamentals; (iv) fundamentals do not have a direct impact on the expected returns but they only affect the transition probability matrix. Overall, our results show that a non-linear relation between market price changes and market fundamentals can be caught within the framework of (Markov) switching regession models. © Springer-Verlag 2003.
2003
Gardini A., Cavaliere G., Costa M. (2003). Fundamentals and asset price dynamics. STATISTICAL METHODS & APPLICATIONS, 12(2), 211-226 [10.1007/s10260-003-0053-3].
Gardini A.; Cavaliere G.; Costa M.
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11585/888839
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