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Simulating Stock Returns Under Switching Regimes - A New Test of Market Efficiency

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Author Info
Meenagh, David
Minford, Patrick
Peel, David

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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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5614.

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Date of creation: Apr 2006
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Handle: RePEc:cpr:ceprdp:5614

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Related research
Keywords: efficient markets; rational expectations; regime switching; stock returns;

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Find related papers by JEL classification:
C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods
C5 - Mathematical and Quantitative Methods - - Econometric Modeling
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. 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. [Downloadable!]
    Other versions:
  2. Rietz, Thomas A., 1988. "The equity risk premium a solution," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 117-131, July. [Downloadable!] (restricted)
  3. James D. Hamilton & Gang Lin, 1996. "Stock Market Volatility and The Business Cycle," University of California at San Diego, Economics Working Paper Series 96-18, Department of Economics, UC San Diego. [Downloadable!]
    Other versions:
  4. Andrew Ang & Geert Bekaert, 2002. "International Asset Allocation With Regime Shifts," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 15(4), pages 1137-1187.
  5. Mehra, Rajnish & Prescott, Edward C., 1988. "The equity risk premium: A solution?," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 133-136, July. [Downloadable!] (restricted)
  6. 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. [Downloadable!] (restricted)
  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. 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. [Downloadable!] (restricted)
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  11. Christopher M. Turner & Richard Startz & Charles R. Nelson, 1989. "A Markov Model of Heteroskedasticity, Risk, and Learning in the Stock Market," NBER Working Papers 2818, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Stephen G. Cecchetti & Pok-sang Lam & Nelson C. Mark, 1990. "Mean Reversion in Equilibrium Asset Prices," NBER Working Papers 2762, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Massimo Guidolin & Allan Timmerman, 2006. "Asset allocation under multivariate regime switching," Working Papers 2005-002, Federal Reserve Bank of St. Louis. [Downloadable!]
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  14. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March. [Downloadable!] (restricted)
  15. 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. [Downloadable!]
  16. Timmermann, Allan, 2000. "Moments of Markov switching models," Journal of Econometrics, Elsevier, vol. 96(1), pages 75-111, May. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  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. [Downloadable!]
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