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Simulating Stock Returns under switching regimes - a new test of market efficiency

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Author Info
Meenagh, David () (Cardiff Business School)
Minford, Patrick () (Cardiff Business School)
Peel, David

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Abstract

A model of profits switches between four regimes with fixed probabilities; the rationally expected profits stream implies the stock market value. This efficient market model is not rejected by UK post-war time-series behaviour of either profits or the FTSE index.

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File URL: http://www.cardiff.ac.uk/carbs/econ/workingpapers/papers/E2006_13.pdf
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Publisher Info
Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2006/13.

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Length: 9 pages
Date of creation: Feb 2006
Date of revision:
Publication status: Published in Economics Letters, 94 (2007), pp. 235-239
Handle: RePEc:cdf:wpaper:2006/13

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Related research
Keywords: regime switching; stock returns; efficient markets; rational expectations;

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Find related papers by JEL classification:
C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods
C5 - Mathematical and Quantitative Methods - - Econometric Modeling
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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References listed on IDEAS
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    Other versions:
  2. Stephen G. Cecchetti & Pok-sang Lam & Nelson C. Mark, 1990. "Mean Reversion in Equilibrium Asset Prices," NBER Working Papers 2762, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Tobias Rydén & Timo Teräsvirta & Stefan Åsbrink, 1998. "Stylized facts of daily return series and the hidden Markov model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 13(3), pages 217-244. [Downloadable!]
    Other versions:
  4. Goetzmann, William N. & Jorion, Philippe, 1999. "Re-Emerging Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(01), pages 1-32, March. [Downloadable!]
  5. Rietz, Thomas A., 1988. "The equity risk premium a solution," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 117-131, July. [Downloadable!] (restricted)
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    Other versions:
  7. William N. Goetzmann & Philippe Jorion, 1998. "Re-emerging Markets," Yale School of Management Working Papers ysm50, Yale School of Management. [Downloadable!]
    Other versions:
  8. James D. Hamilton & Gang Lin, 1996. "Stock Market Volatility and The Business Cycle," University of California at San Diego, Economics Working Paper Series 96-18, Department of Economics, UC San Diego. [Downloadable!]
    Other versions:
  9. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March. [Downloadable!] (restricted)
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    Other versions:
  17. Philippe Jorion & William N. Goetzmann, 1999. "Global Stock Markets in the Twentieth Century," Journal of Finance, American Finance Association, vol. 54(3), pages 953-980, 06. [Downloadable!] (restricted)
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