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Simulating stock returns under switching regimes - A new test of market efficiency

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  • Meenagh, David
  • Minford, Patrick
  • Peel, David

Abstract

A model of profits switches between four regimes with fixed probabilities; the rationally expected profits stream implies the stock market value. This efficient market model is not rejected by UK post-war time-series behaviour of either profits or the FTSE index.

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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 94 (2007)
Issue (Month): 2 (February)
Pages: 235-239

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Handle: RePEc:eee:ecolet:v:94:y:2007:i:2:p:235-239

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  1. Massimo Guidolin & Allan Timmerman, 2006. "Asset allocation under multivariate regime switching," Working Papers 2005-002, Federal Reserve Bank of St. Louis.
  2. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  3. Sullivan, Ryan & Timmermann, Allan & White, Halbert, 2001. "Dangers of data mining: The case of calendar effects in stock returns," Journal of Econometrics, Elsevier, vol. 105(1), pages 249-286, November.
  4. Sergio Rebelo, 2005. "Real Business Cycle Models: Past, Present, and Future," NBER Working Papers 11401, National Bureau of Economic Research, Inc.
  5. Timmermann, Allan, 2000. "Moments of Markov switching models," Journal of Econometrics, Elsevier, vol. 96(1), pages 75-111, May.
  6. Philippe Jorion & William N. Goetzmann, 1999. "Global Stock Markets in the Twentieth Century," Journal of Finance, American Finance Association, vol. 54(3), pages 953-980, 06.
  7. Massimo Guidolin, University of Virginia & Allan Timmermann, 2004. "Strategic Asset Allocation and Consumption Decisions under Multivariate Regime Switching," Econometric Society 2004 Australasian Meetings 349, Econometric Society.
  8. Massimo Guidolin & Allan Timmermann, 2005. "Economic Implications of Bull and Bear Regimes in UK Stock and Bond Returns," Economic Journal, Royal Economic Society, vol. 115(500), pages 111-143, 01.
  9. Turner, Christopher M. & Startz, Richard & Nelson, Charles R., 1989. "A Markov model of heteroskedasticity, risk, and learning in the stock market," Journal of Financial Economics, Elsevier, vol. 25(1), pages 3-22, November.
  10. Hamilton, James D & Gang, Lin, 1996. "Stock Market Volatility and the Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(5), pages 573-93, Sept.-Oct.
  11. William N. Goetzmann & Philippe Jorion, 1997. "Re-emerging Markets," NBER Working Papers 5906, National Bureau of Economic Research, Inc.
  12. Mehra, Rajnish & Prescott, Edward C., 1988. "The equity risk premium: A solution?," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 133-136, July.
  13. Cecchetti, Stephen G & Lam, Pok-sang & Mark, Nelson C, 1990. "Mean Reversion in Equilibrium Asset Prices," American Economic Review, American Economic Association, vol. 80(3), pages 398-418, June.
  14. Tom Arnold & Philip Hersch & J. Harold Mulherin & Jeffry Netter, 1999. "Merging Markets," Journal of Finance, American Finance Association, vol. 54(3), pages 1083-1107, 06.
  15. Rietz, Thomas A., 1988. "The equity risk premium a solution," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 117-131, July.
  16. Andrew Ang & Geert Bekaert, 2002. "International Asset Allocation With Regime Shifts," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1137-1187.
  17. Tobias Rydén & Timo Teräsvirta & Stefan Åsbrink, 1998. "Stylized facts of daily return series and the hidden Markov model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 13(3), pages 217-244.
  18. Massimo Guidolin & Allan Timmerman, 2005. "Optimal portfolio choice under regime switching, skew and kurtosis preferences," Working Papers 2005-006, Federal Reserve Bank of St. Louis.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Stock markets, volatility and predictability
    by chris dillow in Stumbling and Mumbling on 2010-01-03 14:12:44
  2. Progress & data in economics
    by chris dillow in Stumbling and Mumbling on 2009-10-19 13:55:25
  3. Animal Spirits: A review
    by chris dillow in Stumbling and Mumbling on 2009-02-26 13:27:46
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Cited by:
  1. ap Gwilym, Rhys, 2009. "Can behavioral finance models account for historical asset prices?," Cardiff Economics Working Papers E2009/17, Cardiff University, Cardiff Business School, Economics Section.
  2. Hatcher, Michael C. & Minford, Patrick, 2013. "Stabilization policy, rational expectations and price-level versus inflation targeting: a survey," Cardiff Economics Working Papers E2013/14, Cardiff University, Cardiff Business School, Economics Section.

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