In this paper, we use an extension of Hamilton's (1989) Markov switching techniques to describe and analyze stock market returns. Using new tests, we find very strong evidence of switching behaviour. A major innovation of our work is to use a multivariate specification which allows us to examine...

This paper tests between fads and bubbles using a new empirical strategy (based on switching regression econometrics) for distinguishing between competing asset pricing models. By extending the Blanchard and Watson (1982) model, we show how stochastic bubbles can lead to regime switching in...

Economic theory predicts a negative relationship between inventories and the real interest rate, but previous empirical studies (mostly based on the older stock adjustment model) have found little evidence of such a relationship. We derive parametric tests for the role of the interest rate in...

Empirically, ADF tests fail to reject the null hypothesis that sales are I(1). We build a model of inventory behavior that incorporates permanent sales shocks. Analytically, the model with I(1) sales implies that the variance ratio (of log production to log sales) is one in the long run,...

Empirically, sales are I(1). Starting from this fact, we derive three startling results. First, the variance of production is equal to the variance of sales in the long run. Second, this result holds regardless of the strength of production smoothing, stockout avoidance, or cost shocks. Third,...