Trend identification and financial trading strategy by using stochastic trend model with Markov switching slope change and ARCH

Trend identification and financial trading strategy by using stochastic trend model with Markov switching slope change and ARCH

Author(s): M Hakamata
Abstract:
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. 1 Introduction 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.

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Size: 398 kb
Paper DOI: 10.2495/DATA020651

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