Some Markov-Switching Models for the Toronto Stock Exchange

Accolley, Delali (2021): Some Markov-Switching Models for the Toronto Stock Exchange.

Abstract

This research motivates the use of Markov chains in modeling financial time series. Then, it explains the returns and the volatility on the Toronto Stock Exchange (TSX) using some Markov-switching models. These models are: the conditional capital asset pricing model, the conditional Sharpe model, and the exponential autoregressive model with state-dependent heteroscedasticity. It also tests for cointégration between the TSX and some other major exchanges, relying on the first-order and the second-order Markov chains.

The asymmetry, the multiple peaks, or the fat tails in the distribution of the returns on the TSX and on the other exchanges indicates they could not be modelled as random realizations from a single normal distribution. The switching regressions turn out to have a greater explanatory power and provide further understanding of the TSX.

ABSTRACT IN FRENCH- Cette recherché justifie l’utilisation des chaînes de Markov dans la modélisation des séries chronologiques financières. Ensuite, elle explique les rendements et la volatilité sur la Bourse de Toronto (TSX) en utilisant quelques modèles de Markov à changement de régime. Ces modèles sont : le modèle conditionnel d’évaluation des actifs financiers, le modèle conditionnel de Sharpe et le modèle autorégressif exponentiel avec une hétéroscedasdacité conditionnelle qui dépend du régime.Elle teste également la cointégration entre le TSX et d’autres bourses, en s’appuyant sur les chaînes de Markov de premier et de second ordre.

L’asymétrie, les nombreux pics ou l’épaisseur des queues de la distribution des rendements sur la TSX et sur les autres bourses indiquent qu’ils ne peuvent pas être modélisés comme étant des réalisations aléatoires provenant d’une seule distribution normale. Il s’avère que les régressions avec changement de régime ont un plus grand pouvoir explicatif et fournissent une meilleure compréhension du TSX.

• Item Type: MPRA Paper
• Language: English
• Keywords: Econometrics, Finance, Markov Chain
• Subjects: G - Financial Economics > G0 - General; G - Financial Economics > G1 - General Financial Markets; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance

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