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An Extension of the Markov-Switching Model with Time-Varying Transition Probabilities: Bull-Bear Analysis of the Japanese Stock Market

Author

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  • Akifumi Isogai
  • Satoru Kanoh
  • Toshifumi Tokunaga

Abstract

This paper attempts to extend the Markov-switching model with time-varying tansition probabilities(TVTP). The tansition probabilities in the conventional TVTP model are functions of exogenous variables that are time-dependent but with constant coefficients. In this paper the coefficient parameters that express the sensitivities of the exogenous variables are also allowed to vary with time. Using data on Japanese monthly stock returns, it is shown that the explanatory power of the extended model is superior to conventional models.

Suggested Citation

  • Akifumi Isogai & Satoru Kanoh & Toshifumi Tokunaga, 2004. "An Extension of the Markov-Switching Model with Time-Varying Transition Probabilities: Bull-Bear Analysis of the Japanese Stock Market," Hi-Stat Discussion Paper Series d04-43, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hst:hstdps:d04-43
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    File URL: http://hi-stat.ier.hit-u.ac.jp/research/discussion/2004/pdf/D04-43.pdf
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    Cited by:

    1. Oreste Napolitano, 2009. "Is the impact of the ECB Monetary Policy on EMU stock market returns asymmetric?," STUDI ECONOMICI, FrancoAngeli Editore, vol. 0(97), pages 145-180.
    2. Khemiri, Rim & Ali, Mohamed Sami Ben, 2013. "Exchange rate pass-through and inflation dynamics in Tunisia: A Markov-switching approach," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 7, pages 1-30.

    More about this item

    Keywords

    Gibbs sampling; Kalman filter; Marginal likelihood; Market dynamics; Time-varying sensitivity;
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