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An Extension of the Markov-Switching Model with Time-Varying Transition Probabilities: Bull-Bear Analysis of the Japanese Stock Market

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Author Info
Akifumi Isogai
Satoru Kanoh
Toshifumi Tokunaga
Abstract

This paper attempts to extend the Markov-switching model with time-varying tansition probabilities(TVTP). The tansition probabilities in the conventional TVTP model are functions of exogenous variables that are time-dependent but with constant coefficients. In this paper the coefficient parameters that express the sensitivities of the exogenous variables are also allowed to vary with time. Using data on Japanese monthly stock returns, it is shown that the explanatory power of the extended model is superior to conventional models.

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File URL: http://hi-stat.ier.hit-u.ac.jp/research/discussion/2004/pdf/D04-43.pdf
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Paper provided by Institute of Economic Research, Hitotsubashi University in its series Hi-Stat Discussion Paper Series with number d04-43.

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Date of creation: Nov 2004
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Handle: RePEc:hst:hstdps:d04-43

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Related research
Keywords: Gibbs sampling; Kalman filter; Marginal likelihood; Market dynamics; Time-varying sensitivity;

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  1. Malcolm Baker & Jeremy C. Stein, 2002. "Market Liquidity as a Sentiment Indicator," Harvard Institute of Economic Research Working Papers 1977, Harvard - Institute of Economic Research. [Downloadable!]
  2. Albert, James H & Chib, Siddhartha, 1993. "Bayes Inference via Gibbs Sampling of Autoregressive Time Series Subject to Markov Mean and Variance Shifts," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(1), pages 1-15, January.
  3. Lunde A. & Timmermann A., 2004. "Duration Dependence in Stock Prices: An Analysis of Bull and Bear Markets," Journal of Business & Economic Statistics, American Statistical Association, vol. 22, pages 253-273, July. [Downloadable!] (restricted)
    Other versions:
  4. Chang-Jin Kim & Charles R. Nelson, 1998. "Business Cycle Turning Points, A New Coincident Index, And Tests Of Duration Dependence Based On A Dynamic Factor Model With Regime Switching," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 188-201, May. [Downloadable!] (restricted)
  5. Schaller, Huntley & van Norden, Simon, 1997. "Regime Switching in Stock Market Returns," Applied Financial Economics, Taylor and Francis Journals, vol. 7(2), pages 177-91, April. [Downloadable!] (restricted)
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  6. Filardo, Andrew J. & Gordon, Stephen F., 1998. "Business cycle durations," Journal of Econometrics, Elsevier, vol. 85(1), pages 99-123, July. [Downloadable!] (restricted)
    Other versions:
  7. Malcolm Baker & Jeremy C. Stein, 2002. "Market Liquidity as a Sentiment Indicator," NBER Working Papers 8816, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. Maheu, John M & McCurdy, Thomas H, 2000. "Identifying Bull and Bear Markets in Stock Returns," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(1), pages 100-112, January.
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