Decoding Chinese stock market returns: Three-state hidden semi-Markov model

Zhenya Liu, Shixuan Wang

Research output: Contribution to journalArticlepeer-review

11 Citations (Scopus)
185 Downloads (Pure)

Abstract

In this paper, we employ a three-state hidden semi-Markov model (HSMM) to explain the time-varying distribution of the Chinese stock market returns since 2005. Our results indicate that the time-varying distribution depends on the hidden states, which are represented by three market conditions, namely the bear, sidewalk, and bull markets. We find that the inflation, the PMI, and the exchange rate are significantly related to the market conditions in China. A simple trading strategy based on expanding window decoding shows profitability with a Sharpe ratio of 1.14.
Original languageEnglish
Pages (from-to)127-149
JournalPacific-Basin Finance Journal
Volume44
Early online date23 Jun 2017
DOIs
Publication statusPublished - 1 Sept 2017

Keywords

  • Chinese stock market
  • asset return
  • hidden semi-Markov model

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