Are Different National Stock Markets Driven by the Same Stochastic Hidden Variable?

Klaus Grobys

The Review of Finance and Banking, 2011, vol. 03, issue 1, 021-030

Abstract: The following contribution analyzes linkages between preselected national stock markets by a multivariate application of Markov-Switching models. This study shows evidence that the US-stock market and the German and Swedish stock markets are driven by the same unobservable stochastic variable. The latent variable causes these stock markets to switch between highly persistent Bull- and Bear-market regimes which offer strategic market timing opportunities. An out-of-sample experiment where stock market regimes are simultaneously forecasted on a monthly frequency (January 2008 – December 2010) shows that an actively managed equity funds being restricted to hold stocks permanently, dominates all passive trading strategies that account for internationally diversified equity portfolios.

Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:rfb:journl:v:03:y:2011:i:1:p:021-030

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