Granger Centre Seminar: Yong Song (University of Melbourne)

NB: This webinar is earlier than the usual time slot at 10am

Identification and forecasting of bull and bear markets using multivariate returns (with John Maheu and Jia Liu)

Abstract:  Bull and bear market identification generally focuses on a broad index of returns through a univariate analysis. This paper proposes a new approach to identify and forecast bull and bear markets through multivariate returns. The model assumes all assets are directed by a common discrete state variable from a hierarchical Markov switching model. The hierarchical specification allows the cross-section of state specific means and variances to differ over bull and bear markets. We investigate several empirically realistic specifications that permit feasible estimation even with 100 assets. Our results show that the multivariate framework provides competitive bull and bear regime identification and improves portfolio performance and density prediction compared to several benchmark models including univariate Markov switching models.