Markov Regime Switching Model as a Trading Tool

B. Eftekhari

Accounting and Finance Discussion Papers from Faculty of Economics, University of Cambridge

Abstract: Using two specification tests, the returns from 17 emerging markets and the S&P 500 are tested for Markov regime switching. A trading strategy is formed that invests in the market only when the Markov switching model estimate for probability of a positive returns state in the next period is above a certain trigger level. The trading rule outperforms the index in the markets that show significant regime switching from the specification tests.

Date: 1997-06
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camafp:97-af34

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