Demarcating stable and turbulent regimes in Taiwan's stock market

Various trading rules involving derivatives have been widely applied by practitioners under a wide range of market conditions to date, however, few econometric models can provide a way to accurately decide when to apply those strategies. In this paper, we employ the Innovation Regime-Switching (IRS) model (Kuan, et al, 2005, JBES) to separate stock price sample periods into stable and turbulent regimes on the basis of their dynamic behaviors. Our results show that, based on regime identification, we can obtain satisfactory profits by implementing appropriate and timely derivative strategies.