Modeling and analysis for stock return movements along with exchange rates and interest rates in Markov regime-switching models
- 221 Downloads
Since the Asian financial crisis and the global financial crisis, the regime shift behavior has been notable in the stock markets. We examine the effects of interest rates and foreign exchange rates on stock returns and the cross-correlations of Korean stock returns associated with three other countries: Japan, USA, and China, using the Hamilton 2-regime Markov Switching model, for the period January 1993–December 2016. In both regimes, the volatility in the Korean stock market is greater than Japan and USA, but less than China. In regime 1 with low-volatility, the stock returns of both Korea and Japan are significantly affected first by their exchange rates and then by their interest rates. In regime 2 with high-volatility, the Korean stock market is explained by neither of the two exogenous variables while the Japanese stock returns respond positively to the exchange rates but negatively to the interest rates. The transition probability from regime 1 to regime 2 is greater than the reverse probability in the Korean stock market, which is opposite in Japan. Considering all four countries simultaneously, the Korean stock market is highly influenced by both the US and Japanese stock market in regime 1 with low-volatility, but only influenced by the Japanese stock market in regime 2 with high-volatility.
KeywordsMarkov regime switching model Stock returns Exchange rates Interest rates
This work was supported by the 2017 Hongik University Academic Research Support Fund.
Compliance with ethical standards
Conflict of interest
The authors declare that they have no conflicts of interest.
- 3.Nishiyama, K.: Some evidence of regime shifts in international stock markets. Manag. Financ. 24, 30–55 (1998)Google Scholar
- 5.Cai, J.: A Markov model of unconditional variance in ARCH. J. Bus. Econ. Stat. 12, 309–316 (1994)Google Scholar
- 8.Ismail, M.T., Isa, Z.: Identifying regime shifts in Malaysian stock market returns. Int. Res. J. Financ. Econ. 15, 44–57 (2008)Google Scholar
- 10.Gray, S. F.: An analysis of conditional regime-switching models. Working Paper, Fuqua School of Business, Duke University (1995)Google Scholar
- 15.Kim, S., Kim, S., Choi, K.: Markov regime-switching models for stock returns along with exchange rates and interest rates in Korea. In: Lee, W., Choi, W., Jung, S., Song, M. (eds.) Proceedings of the 7th International Conference on Emerging Databases. Lecture Notes in Electrical Engineering, vol. 461, pp. 253–259. Springer, Singapore (2018)Google Scholar
- 21.Rice, J.A.: Mathematical Statistics and Data Analysis. Thomson Brooks/Cole, Pacific Grove (2007)Google Scholar
- 22.Sanchez-Espigares, J. A., Jose, A. L.: MSwM: Fitting Markov Switching Models. R package version 1.2. https://CRAN.R-project.org/package=MSwM, accessed 30 Jun 2017
- 24.Campbell (2002) Campbell, S.D.: Specification Testing and Semiparametric Estimation of Regime Switching Models: An Examination of the US Short Term Interest Rate, Brown University Department of Economics Working Paper #2002–2026 (2002)Google Scholar
- 26.Yuan, C.: Forecasting exchange rates: the multi-state Markov-switching model with smoothing. Int. Rev. Econ. Financ. http://economics.umbc.edu/files/2014/09/wp_09_115.pdf, accessed 3 Jun 2017
- 28.Li, Y., Cui, L., Lin, C.: Modeling and analysis for multi-state systems with discrete-time Markov regime-switching. Reliab. Eng. Syst. Safe. 166, 41–49 (2017)Google Scholar
- 30.François, P., Gauthier, G., Godin, F.: Optimal hedging when the underlying asset follows a regime-switching Markov process. Eur. J. Oper. Res. 237(1), 312–322 (2014)Google Scholar