Are Different National Stock Markets Driven by the Same Stochastic Hidden Variable?
Are Different National Stock Markets Driven by the Same Stochastic Hidden Variable?
Author(s): Klaus GrobysSubject(s): Economy, Financial Markets
Published by: EDITURA ASE
Keywords: regime switching; portfolio management; international investing; predictability; stock markets;
Summary/Abstract: The following contribution analyzes linkages between preselected national stock markets by a multivariate application of Markov-Switching models. This study shows evidence that the US-stock market and the German and Swedish stock markets are driven by the same unobservable stochastic variable. The latent variable causes these stock markets to switch between highly persistent Bull- and Bear-market regimes which offer strategic market timing opportunities. An out-of-sample experiment where stock market regimes are simultaneously forecasted on a monthly frequency (January 2008 – December 2010) shows that an actively managed equity funds being restricted to hold stocks permanently, dominates all passive trading strategies that account for internationally diversified equity portfolios.
Journal: The Review of Finance and Banking
- Issue Year: 3/2011
- Issue No: 1
- Page Range: 21-30
- Page Count: 10
- Language: English