Stock Returns Under Different Market Regimes: An Application of Markov Switching Models to 24 European Indices
Stock Returns Under Different Market Regimes: An Application of Markov Switching Models to 24 European Indices
Author(s): Anton GerunovSubject(s): Economy, Business Economy / Management, Financial Markets
Published by: Институт за икономически изследвания при Българска академия на науките
Keywords: market returns; Markov switching model; regime change; European stocks
Summary/Abstract: This paper studies the different modes of operation of European stock markets. Using data on 24 European indices over a period of 15 years, we show that these can be well represented by a Hidden Markov Model with two regimes that roughly correspond to bull and bear markets. We further estimate regime parameters and show that the alternate regimes have very different risk-return tradeoffs with clear implications for portfolio management. Corresponding transition probability matrices show the remarkable persistence of states and give a possible quantitative estimate of the degree of inertia in financial markets. Regime-switching coordination across markets is further examined, showing that moments of correlations are followed by idiosyncratic episodes and thus, risk diversification through regime arbitrage is possible.
Journal: Икономически изследвания
- Issue Year: 2023
- Issue No: 1
- Page Range: 18-35
- Page Count: 18
- Language: English