Modeling local trends with regime shifting models with time-varying probabilities

Sergio M. Focardi, Frank J. Fabozzi and Davide Mazza

International Review of Financial Analysis, 2019, vol. 66, issue C

Abstract: In this paper we show that persistence and switching of trends are phenomena that appear in most long-lived stock return series. We model stock returns using a family of models based on hidden Markov models with duration-dependent transition probabilities. Trends are correlated so that aggregates such as indexes exhibit the same persistence and switching behavior as single stocks themselves. Hidden Markov models can thus explain medium-term momentum.

Keywords: Regime shifting; Hidden Markov models; Duration-dependent Markov switching models; Return models; Momentum; Reversals (search for similar items in EconPapers)
JEL-codes: C58 G10 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:66:y:2019:i:c:s105752191830752x

DOI: 10.1016/j.irfa.2019.06.007

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