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Business confidence and stock returns in the USA: a time-varying Markov regime-switching model

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  • Emrah İ. Çevik
  • Turhan Korkmaz
  • Erdal Atukeren

Abstract

This article presents evidence in favour of time-varying Markov regime-Switching (MS) properties in all shares stock returns in the USA. The model specifications include the US Institute for Supply Management's (ISM) manufacturing and Nonmanufacturing Business Activity Index (NMBAI) in the transition equations. We find that the developments in the ISM manufacturing index affect the regime-switching probabilities in both bull and bear stock market periods. The business activity in nonmanufacturing sectors, on the other hand, has a bearing only on bull market periods. We also test for the possibility of a common factor influencing both stock returns and business confidence in the manufacturing sector by estimating a time-varying MS model with the US industrial production in the transition equation. We find that the null hypothesis of a fixed transition probability MS model cannot be rejected when the US industrial production index is included in the transition equation of a time-varying MS model. We conclude that the information content in the ISM manufacturing confidence index, such as expectational shifts, has a separate influence on the stock market regimes over and above that of actual developments in industrial production.

Suggested Citation

  • Emrah İ. Çevik & Turhan Korkmaz & Erdal Atukeren, 2012. "Business confidence and stock returns in the USA: a time-varying Markov regime-switching model," Applied Financial Economics, Taylor & Francis Journals, vol. 22(4), pages 299-312, February.
  • Handle: RePEc:taf:apfiec:v:22:y:2012:i:4:p:299-312
    DOI: 10.1080/09603107.2011.610742
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    Cited by:

    1. Maximo Camacho & Fernando Soto, 2018. "Consumer confidence’s boom and bust in Latin America," Working Papers 18/02, BBVA Bank, Economic Research Department.
    2. repec:eee:reveco:v:53:y:2018:i:c:p:109-117 is not listed on IDEAS
    3. David R Gallagher & Peter A Gardner & Camille H Schmidt, 2015. "Style factor timing: An application to the portfolio holdings of US fund managers," Australian Journal of Management, Australian School of Business, vol. 40(2), pages 318-350, May.

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