Markov Switching Models in Empirical Finance

Abstract

I review the burgeoning literature on applications of Markov regime switching models in empirical finance. In particular, distinct attention is devoted to the ability of Markov Switching models to fit the data, filter unknown regimes and states on the basis of the data, to allow a powerful tool to test hypotheses formulated in light of financial theories, and to their forecasting performance with reference to both point and density predictions. The review covers papers concerning a multiplicity of sub-fields in financial economics, ranging from empirical analyses of stock returns, the term structure of default-free interest rates, the dynamics of exchange rates, as well as the joint process of stock and bond returns.

Citation

Guidolin, M. (2011), "Markov Switching Models in Empirical Finance", Drukker, D.M. (Ed.) Missing Data Methods: Time-Series Methods and Applications (Advances in Econometrics, Vol. 27 Part 2), Emerald Group Publishing Limited, Leeds, pp. 1-86. https://doi.org/10.1108/S0731-9053(2011)000027B004