An Extension of the Markov-Switching Model with Time-Varying Transition Probabilities: Bull-Bear Analysis of the Japanese Stock Market

Akifumi Isogai, Satoru Kanoh and Toshifumi Tokunaga

Hi-Stat Discussion Paper Series from Institute of Economic Research, Hitotsubashi University

Abstract: This paper attempts to extend the Markov-switching model with time-varying tansition probabilities(TVTP). The tansition probabilities in the conventional TVTP model are functions of exogenous variables that are time-dependent but with constant coefficients. In this paper the coefficient parameters that express the sensitivities of the exogenous variables are also allowed to vary with time. Using data on Japanese monthly stock returns, it is shown that the explanatory power of the extended model is superior to conventional models.

Keywords: Gibbs sampling; Kalman filter; Marginal likelihood; Market dynamics; Time-varying sensitivity (search for similar items in EconPapers)
Date: 2004-11
New Economics Papers: this item is included in nep-cfn, nep-ecm, nep-ets and nep-fin
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:hst:hstdps:d04-43

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