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A Duration Hidden Markov Model for the Identification of Regimes in Stock Market Returns

  • Christos Ntantamis


    (School of Economics and Management, University of Aarhus and CREATES)

This paper introduces a Duration Hidden Markov Model to model bull and bear market regime switches in the stock market; the duration of each state of the Markov Chain is a random variable that depends on a set of exogenous variables. The model not only allows the endogenous determination of the different regimes and but also estimates the effect of the explanatory variables on the regimes' durations. The model is estimated here on NYSE returns using the short-term interest rate and the interest rate spread as exogenous variables. The bull market regime is assigned to the identified state with the higher mean and lower variance; bull market duration is found to be negatively dependent on short-term interest rates and positively on the interest rate spread, while bear market duration depends positively the short-term interest rate and negatively on the interest rate spread.

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Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2010-51.

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Length: 26
Date of creation: 25 Aug 2010
Date of revision:
Handle: RePEc:aah:create:2010-51
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  1. Dueker, Michael J, 1997. "Markov Switching in GARCH Processes and Mean-Reverting Stock-Market Volatility," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(1), pages 26-34, January.
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