Author(s): M Hakamata
This paper focuses on two characteristics of the stock price indices — trend slope changes and heteroscedasticit y.
To capture these characteristics, we propose a stochastic trend model with Markov switching slope changes and ARCH (MS-SC/ARCH), and evaluate the usefulness of the MS-SC/ARCH model for a trading strategy.
The MS-SC/ARCH model consists of a no-slope change and low volatility regime, and a slope change and high volatility regime.
The time series shifts between the two regimes according to a first-order Markov switching process.
In the empirical analysis using TOPIX, we succeeded in estimating the effective trend slope for trading, and obtained superior performance over the TOPIX sell-and-hold portfolio by using a trading strategy based on the MS-SC/ARCH model.
In practical financial markets, some practitioners, including dealers and money managers of foreign exchange rates, stocks, commodities, etc., regard “traditional technical analysis” as an important analytical tool.
Size: 398 kb
Paper DOI: 10.2495/DATA020651
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