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

John Powell, Rubén Roa, Jing Shi, Viliphonh Xayavong

    Research output: Contribution to journalArticlepeer-review

    4 Citations (Scopus)

    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.

    Original languageEnglish
    Pages (from-to)205-221
    Number of pages17
    JournalAustralian Journal of Management
    Volume32
    Issue number2
    DOIs
    Publication statusPublished - Dec 2007

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