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Unveiling Market Regimes: A Hidden Markov Model Application for Central Bank Interest Rate Prediction

Author

Listed:
  • Tampouris Achilleas

    (University of Western Makedonia, Kila Campus)

  • Chaido Dritsaki

    (University of Western Makedonia, Kila Campus)

Abstract

Accurately predicting central bank interest rates is crucial for understanding future economic conditions and formulating effective monetary policy. This study leverages a linear regression model trained on historical interest rate and inflation data to forecast the central bank interest rates for various countries in 2024. In addition, this research employs Hidden Markov Models (HMMs) to provide deeper insights into the underlying economic conditions influencing these predictions. HMM analysis assigns countries to different hidden states, reflecting various economic environments and challenges. These methodologies together offer a comprehensive framework for anticipating and preparing for future monetary policy actions. The findings hold valuable implications for policymakers and financial market participants, guiding them in navigating complex economic landscapes and addressing potential challenges effectively.

Suggested Citation

  • Tampouris Achilleas & Chaido Dritsaki, 2025. "Unveiling Market Regimes: A Hidden Markov Model Application for Central Bank Interest Rate Prediction," Springer Proceedings in Business and Economics,, Springer.
    • Handle: RePEc:spr:prbchp:978-3-031-76658-9_15
    DOI: 10.1007/978-3-031-76658-9_15
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