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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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  • Akifumi Isogai
  • Satoru Kanoh
  • Toshifumi Tokunaga
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    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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    Bibliographic Info

    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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