CONSTRUCTION OF COINTEGRATION INDEX AND UTILIZATION OF MARKOV SWITCHING MODELS TO IDENTIFY RISK AND RETURN: EVIDENCE BASED ON BRAZIL’S STOCK MARKET (BOVESPA)

Patrícia Marília Ricomini e Almeida (), Diogenes Manoel Leiva Martin (), Herbert Kimura and Wilson Toshiro Nakamura ()
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Patrícia Marília Ricomini e Almeida: Universidade Presbiteriana Mackenzie (UPM)
Diogenes Manoel Leiva Martin: Universidade Presbiteriana Mackenzie (UPM)
Wilson Toshiro Nakamura: Universidade Presbiteriana Mackenzie (UPM)

Revista de Economia Mackenzie (REM), 2008, vol. 6, issue 6, 41-65

Abstract: This paper examines the performance of a general dynamic equity inde-xing strategy based on cointegration, from a market efficiency perspective, observing the different levels of risk and regimes. This new portfolio will be compared with Markowitz portfolio model. The identification of these auto-regressive regimes in the process of generating returns in the Brazilian Market, especially in Bovespa, for the Plano Real period (January of 1995 to Septem-ber of 2004), will be elaborated trough a Markov Switching Model. With this model, is possible to identify the nonlinear structure of the data and it is rela-tion to the conditional mean and conditional variance. As result the dynamics of the data generation process, the returns can be described as function of the growth cycle (“bull markets†) and decrease (“bear markets†).

Keywords: Securities return generation process; Market efficiency; Coin-tegration; Markovian switching regimes; Bovespa. (search for similar items in EconPapers)
Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:aft:journl:v:6:6:2008:jan:dec:p:41-65

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