Compares the aggregate stock returns of five countries in order to understand their behaviour, bearing in mind shocks and regime shifts. Applies a Markov‐switching model to examine discrete shifts in regime in equity markets from 1976 to 1991 in Germany, Japan, USA, United Kingdom and Canada. Finds the German market takes by far the longest time to return to normality after a shock, and Canada the shortest, but that German stock return variance has the lowest mean return in the high‐volatility state. Detects an increase in volatility well before the stock market crash of 1987. Concludes that stock returns are time varying and the conditional variance is state‐dependent, and that markets vary widely in frequency of regime shifts and persistence.
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