The Number of Regimes Across Asset Returns: Identification and Economic Value

Mathieu Gatumel () and Florian Ielpo ()
Additional contact information
Mathieu Gatumel: CERAG - Centre d'études et de recherches appliquées à la gestion - UPMF - Université Pierre Mendès France - Grenoble 2 - CNRS - Centre National de la Recherche Scientifique
Florian Ielpo: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, Pictet Asset Management - Pictet Asset Management

Post-Print from HAL

Abstract: A shared belief in the financial industry is that markets are driven by two types of regimes. Bull markets would be characterized by high returns and low volatility whereas bear markets would display low returns coupled with high volatility. Modeling the dynam- ics of different asset classes (stocks, bonds, commodities and currencies) with a Markov- Switching model and using a density-based test, we reject the hypothesis that two regimes are enough to capture asset returns' evolutions for many of the investigated assets. Once the accuracy of our test methodology has been assessed through Monte Carlo experi- ments, our empirical results point out that between two and five regimes are required to capture the features of each asset's distribution. Moreover, we show that only a part of the underlying number of regimes is explained by the distributional characteristics of the returns such as kurtosis. A thorough out-of-sample analysis provides additional evidence that there are more than just bulls and bears in financial markets. Finally, we high- light that taking into account the real number of regimes allows both improved portfolio returns and density forecasts.

Keywords: Bull and bear markets; Markov switching models; Number of regimes; Density based tests (search for similar items in EconPapers)
Date: 2011
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00658540v1
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published in 2011

Downloads: (external link)
https://shs.hal.science/halshs-00658540v1/document (application/pdf)

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: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00658540

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().