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Smooth Transition Regression Models in UK Stock Returns

Nektarios Aslanidis
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Nektarios Aslanidis: Department of Economics, University of Crete, Greece

No 201, Working Papers from University of Crete, Department of Economics

Abstract: This paper models UK stock market returns in a smooth transition regression (STR) framework. A variety of financial and macroeconomic series are employed that are assumed to influence UK stock returns, namely GDP, interest rates, inflation, money supply and US stock prices. STR models are estimated where the linearity hypothesis is strongly rejected for at least one transition variable. These non-linear models describe the in-sample movements of the stock returns series better than the corresponding linear model. Moreover, the US stock market appears to play an important role in determining the UK stock market returns regime.

Keywords: smooth transition regression models; linearity tests; forecasting; stock returns. (search for similar items in EconPapers)
JEL-codes: E44 E47 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2002-09
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