Identifying and Explaining the Number of Regimes Driving Asset Returns
A shared belief in the financial industry is that markets are driven by two types of regimes. Bull markets would be characterized by high returns and low volatil- ity whereas bear markets would display low returns coupled with high volatility. Modelling the dynamics of different asset classes (stocks, bonds, commodities and currencies) with a Markov-Switching model and using a density-based test, we re- ject the hypothesis that two regimes are enough to capture asset returns' evolutions. Once the accuracy of our test methodology has been assessed through Monte Carlo experiments, our empirical results point out that between three and five regimes are required to capture the features of each asset's distribution. A probit multinomial regression highlights that only a part of the underlying number of regimes is par- tially explained by the absolute average yearly risk premium and by distributional charateristics of the returns such as the kurtosis.
|Date of creation:||2011|
|Date of revision:|
|Publication status:||Published in Cahier de recherche du CERAG 2011-05 E2. 2011|
|Note:||View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00658544|
|Contact details of provider:|| Web page: https://hal.archives-ouvertes.fr/|
When requesting a correction, please mention this item's handle: RePEc:hal:cesptp:halshs-00658544. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.