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Modeling regime transition in stock index futures markets and forecasting implications
Author(s) -
Kanas Angelos
Publication year - 2008
Publication title -
journal of forecasting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.543
H-Index - 59
eISSN - 1099-131X
pISSN - 0277-6693
DOI - 10.1002/for.1084
Subject(s) - econometrics , economics , futures contract , stock index futures , volatility (finance) , dividend yield , stock (firearms) , index (typography) , stock market index , dividend , regime change , chen , financial economics , regime shift , stock market , computer science , dividend policy , ecosystem , law , ecology , horse , world wide web , engineering , biology , paleontology , democracy , mechanical engineering , finance , politics , political science
Using a time‐varying regime‐switching vector error correction approach, this paper seeks to address which factors explain the transition across regimes of the US and the UK stock index futures markets. The findings suggest that the basis exercises a significant effect in regime transition. The basis effect is driven by a dividend yield effect in the UK, and by a dividend yield effect and an interest rate effect in the USA. The volatility of the underlying index is another significant factor, which is consistent with the significance of the basis in conjunction with Chen et al. (1995). Furthermore, there is evidence of an international regime transition effect from the UK to the USA. In most cases, forecasts based on time‐varying regime transition models are more accurate than forecasts based on models with constant transition probabilities. Copyright © 2008 John Wiley & Sons, Ltd.