I consider the problem of detecting and predicting regime switching behaviour in the context of Indian Stock Market data. First I discuss detection of volatility change points using the LRT and the Binary Segmentation procedure of Vostrikova (1981). The detected volatility changes are correlated...

This paper fits Markov switching models to quarterly New Zealand aggregate GDP growth rates for the period 1978:1 to 2003:2 in order to analyse changes in mean and volatility over time. The models considered are drawn from a simple class of parsimonious, four state, Markov switching models which...

In this paper we consider the problem of identifiability of the two-state Markovian Arrival process (MAP2). In particular, we show that the MAP2 is not identifiable and conditions are given under which two different sets of parameters, induce identical stationary laws for the observable process.

How many cartels are there? The answer is important in assessing the efficiency of competition policy. We present a Hidden Markov Model that answers the question, taking into account that often we do not know whether a cartel exists in an industry or not. Our model identifies key policy...

A Hidden Markov Chain (HMC) is applied to study the forward premium puzzle. The weekly quotient of the interest rate differential divided by the log exchange rate change is modeled as a Hidden Markov process. Compared with existing standard approaches, the Hidden Markov approach allows a...

Given an observed stochastic process, computational mechanics provides an explicit and efficient method of constructing a minimal hidden Markov model within the class of maximally predictive models. Here, the corresponding so-called ε-machine encodes the mechanisms of prediction. We propose an...

This paper studies the codependence among, and drawdown and drawup properties of, US$ interest rates. The problem is attacked from the angle of regime switching. Different regimes are identified using the Hidden Markov Models (HMMs). The statistical properties in each state are examined...

A Hidden Markov Model with mean reverting characteristics is considered as a model for financial time series, particularly interest rates. The optimal filter for the state of the hidden Markov chain is obtained. A number of auxiliary filters are obtained that enable the parameters of the model...