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Detection of High and Low States in Stock Market Returns with MCMC Method in a Markov Switching Model

Author

Listed:
  • Clément Rey

    (CERMICS - Centre d'Enseignement et de Recherche en Mathématiques et Calcul Scientifique - ENPC - École des Ponts ParisTech)

  • Serge Rey

    (CATT - Centre d'Analyse Théorique et de Traitement des données économiques - UPPA - Université de Pau et des Pays de l'Adour)

  • Jean-Renaud Viala

    (AMUNDI Asset Management)

Abstract

To detect abnormal states in stock market returns, this study considers seven indices over an 21-year period, the Dow Jones, S&P500, Nasdaq, Nikkei225, the FTSE100, DAX, and CAC40. Three states are possible, namely a state of high rate of return, a state of low rate of return, both with high volatility and an intermediate state with low volatility. To determine the state of the market at each date, we study the returns using Markov Chain Monte Carlo method (Metropolis-Hastings algorithm). Then at a second time, using a Cramer's coefficient, we deduce association coefficients or "correlations" among the different states of the major stock exchange markets around the world. First, the associations were globally stronger during the subprime crisis than during the dot-com bubble period. Third, the associations between the Nikkei and the other markets indices are systematically lower, indicating the relative disconnection of the Japanese market.

Suggested Citation

  • Clément Rey & Serge Rey & Jean-Renaud Viala, 2014. "Detection of High and Low States in Stock Market Returns with MCMC Method in a Markov Switching Model," Post-Print hal-01880340, HAL.
    • Handle: RePEc:hal:journl:hal-01880340
    DOI: 10.1016/j.econmod.2014.05.003
    Note: View the original document on HAL open archive server: https://univ-pau.hal.science/hal-01880340
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    2. Hsu, Yuan-Lin & Lin, Shih-Kuei & Hung, Ming-Chin & Huang, Tzu-Hui, 2016. "Empirical analysis of stock indices under a regime-switching model with dependent jump size risks," Economic Modelling, Elsevier, vol. 54(C), pages 260-275.
    3. Jacques Jaussaud & Sophie Nivoix & Serge Rey, 2015. "The Great East Japan Earthquake and Stock Prices," Economics Bulletin, AccessEcon, vol. 35(2), pages 1237-1261.
    4. Usabiaga, Carlos & Núñez, Fernando & Arendt, Lukasz & Gałecka-Burdziak, Ewa & Pater, Robert, 2022. "Skill requirements and labour polarisation: An association analysis based on Polish online job offers," Economic Modelling, Elsevier, vol. 115(C).
    5. Ichkitidze, Yuri, 2018. "Temporary price trends in the stock market with rational agents," The Quarterly Review of Economics and Finance, Elsevier, vol. 68(C), pages 103-117.

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