Author(s)

M Hakamata

Abstract

This paper focuses on two characteristics of the stock price indices — trend slope changes and heteroscedasticit y. To capture these characteristics, we propose a stochastic trend model with Markov switching slope changes and ARCH (MS-SC/ARCH), and evaluate the usefulness of the MS-SC/ARCH model for a trading strategy. The MS-SC/ARCH model consists of a no-slope change and low volatility regime, and a slope change and high volatility regime. The time series shifts between the two regimes according to a first-order Markov switching process. In the empirical analysis using TOPIX, we succeeded in estimating the effective trend slope for trading, and obtained superior performance over the TOPIX sell-and-hold portfolio by using a trading strategy based on the MS-SC/ARCH model. 1 Introduction In practical financial markets, some practitioners, including dealers and money managers of foreign exchange rates, stocks, commodities, etc., regard \“traditional technical analysis” as an important analytical tool. Taylor [1]

Keywords