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

Zhenya Liu; Shixuan Wang

doi:10.1016/j.pacfin.2017.06.007

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

Zhenya Liu, Shixuan Wang

Economics

Research output: Contribution to journal › Article › peer-review

11 Citations (Scopus)

175 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 language	English
Pages (from-to)	127-149
Journal	Pacific-Basin Finance Journal
Volume	44
Early online date	23 Jun 2017
DOIs	https://doi.org/10.1016/j.pacfin.2017.06.007
Publication status	Published - 1 Sept 2017

Keywords

Chinese stock market
asset return
hidden semi-Markov model

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Liu_&_Wang_Decoding_Chinese_stock_market_Pacific-Basin_Finance_Journal_2017Accepted author manuscript, 2.27 MBLicence: Creative Commons: Attribution-NonCommercial-NoDerivs (CC BY-NC-ND)

http://www.sciencedirect.com/science/article/pii/S0927538X16301494Licence: None: All rights reserved

Cite this

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title = "Decoding Chinese stock market returns:: Three-state hidden semi-Markov model",

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.",

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AB - 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.

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

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Keywords

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