Forecasting Prices in Regime-Switching Markets

Martin Gonzalez-Rozada and Luis Pereiro

Department of Economics Working Papers from Universidad Torcuato Di Tella

Abstract: Linear autoregressive (LAR) models poorly predict asset prices in nonlinear, regime-switching markets. We introduce SETAR, a threshold model that accounts for nonlinearities, to test for the existence of regime-switching in global equity markets. A comparison of SETAR‘s predictive power against that of LAR models suggests that SETAR yields more accurate long forecasts, in both emerging and developed stock markets. We discuss extensions of threshold models into portfolio management, corporate valuation, and the long-term forecasting of financial indicators.

Pages: 16 pages
Date: 2013-06
New Economics Papers: this item is included in nep-for
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Persistent link: https://EconPapers.repec.org/RePEc:udt:wpecon:2013_2

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