ON THE PREDICTIVE PERFORMANCE OF THE STOCK RETURNS BY USING THE MARKOV-SWITCHING MODELS
Abstract: This paper proposes the basic predictive regression and Markov Regime-Switching regression to predict the excess stock returns in both US and Sweden stock markets. The analysis shows that the Markov Regime-Switching regression models out perform the linear ones in out-of-sample forecasting, which is due to the fact that the regime-switching models capture the economic expansion and recession better.
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