Economics at your fingertips  

Business confidence and stock returns in the USA: a time-varying Markov regime-switching model

Emrah Çevik (), Turhan Korkmaz and Erdal Atukeren

Applied Financial Economics, 2012, vol. 22, issue 4, 299-312

Abstract: This article presents evidence in favour of time-varying Markov regime-Switching (MS) properties in all shares stock returns in the USA. The model specifications include the US Institute for Supply Management's (ISM) manufacturing and Nonmanufacturing Business Activity Index (NMBAI) in the transition equations. We find that the developments in the ISM manufacturing index affect the regime-switching probabilities in both bull and bear stock market periods. The business activity in nonmanufacturing sectors, on the other hand, has a bearing only on bull market periods. We also test for the possibility of a common factor influencing both stock returns and business confidence in the manufacturing sector by estimating a time-varying MS model with the US industrial production in the transition equation. We find that the null hypothesis of a fixed transition probability MS model cannot be rejected when the US industrial production index is included in the transition equation of a time-varying MS model. We conclude that the information content in the ISM manufacturing confidence index, such as expectational shifts, has a separate influence on the stock market regimes over and above that of actual developments in industrial production.

Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7) Track citations by RSS feed

Downloads: (external link) (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Ordering information: This journal article can be ordered from

DOI: 10.1080/09603107.2011.610742

Access Statistics for this article

Applied Financial Economics is currently edited by Anita Phillips

More articles in Applied Financial Economics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().

Page updated 2021-06-01
Handle: RePEc:taf:apfiec:v:22:y:2012:i:4:p:299-312