Introducing Nonlinear Dynamics to Two-Regime Market Model: Theory and Evidence

Monash University Working Paper

36 Pages Posted: 11 Feb 2003

See all articles by Vijaya B. Marisetty

Vijaya B. Marisetty

RMIT University; Financial Research Network (FIRN)

George Woodward

University of Colorado, Colorado Springs

Date Written: January 2003

Abstract

The existing two-regime asset pricing models do not reach a consensus, neither in the definition of bull and bear market conditions nor in modelling the non-stationarity of the beta. We propose a new logistic smooth transition regression model to address the beta non-stationarity issue. Using eight different definitions of bull and bear market conditions, we intend to ascertain the most appropriate definition with which to capture the non-linear dynamics of security returns. We find through a series of linearity tests that our model provides an adequate description of the data generating process. Further we explore the adequacy of a duration dependent description of market conditions in our model. Often we find that yield spread is a more appropriate definition of market condition than is a coincident economic indicator, excess market returns, and a moving average of excess market returns. We also find duration dependence in market conditions.

JEL Classification: G12, G14, C50, C51

Suggested Citation

Marisetty, Vijaya B. and Woodward, George, Introducing Nonlinear Dynamics to Two-Regime Market Model: Theory and Evidence (January 2003). Monash University Working Paper, Available at SSRN: https://ssrn.com/abstract=351540 or http://dx.doi.org/10.2139/ssrn.351540

Vijaya B. Marisetty (Contact Author)

RMIT University ( email )

Business
Level 12, 239 Bourke Street
Melbourne, Victoria 3000
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

George Woodward

University of Colorado, Colorado Springs ( email )

1420 Austin Bluffs Parkway
Colorado Springs, CO 80918-7150
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
234
Abstract Views
1,509
rank
143,177
PlumX Metrics