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A Test for Long-Term Cyclical Clustering of Stock Market Regimes

Author

Listed:
  • John Powell

    (Department of Finance, Banking and Property, Massey University, Palmerston North, New Zealand.)

  • Rubén Roa

    (Department of Statistics, Universidad de Concepcion, Chile.)

  • Jing Shi

    (School of Finance, Jiangxi University of Finance and Economics, Nanchang, China, and School of Finance and Applied Statistics, The Australian National University, Canberra, ACT 0200.)

  • Viliphonh Xayavong

    (University of Western Australia.)

Abstract

This paper finds that observed monthly United States stock index returns are consistent with an underlying mechanism of shifts in regimes amongst multiple states with differing means and volatility. An issue of especial interest is whether long-term clustering of regimes gives rise to stock market cycles. The paper therefore introduces a likelihood ratio test for long-term clustering of regimes. Clustering of regime presence tends to involve much longer term cycles than the bull and bear market cycles identified by Pagan and Sossounov (2003), thus extending the research issues that are associated with the analysis of mean returns using multiple state regime-switching models.

Suggested Citation

  • John Powell & Rubén Roa & Jing Shi & Viliphonh Xayavong, 2007. "A Test for Long-Term Cyclical Clustering of Stock Market Regimes," Australian Journal of Management, Australian School of Business, vol. 32(2), pages 205-221, December.
    • Handle: RePEc:sae:ausman:v:32:y:2007:i:2:p:205-221
    DOI: 10.1177/031289620703200203
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    References listed on IDEAS

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    Cited by:

    1. Jing Tian & Qing Zhou, 2018. "Improving equity premium forecasts by incorporating structural break uncertainty," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(S1), pages 619-656, November.

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