Simulating Stock Returns Under Switching Regimes - a New Test of Market Efficiency
17 Pages Posted: 5 Jul 2006
Date Written: April 2006
A model of profits switches between four regimes with fixed probabilities; the rationally expected profits stream implies the stock market value. This efficient market model is not rejected by UK post-war time-series behaviour of either profits or the FTSE index.
Keywords: Regime switching, stock returns, efficient markets, rational expectations
JEL Classification: C15, C5, G14
Suggested Citation: Suggested Citation