Modelling stock market excess returns by Markov modulated Gaussian noise

Cover of: Modelling stock market excess returns by Markov modulated Gaussian noise |

Published by University of Glasgow, Department of Economics in Glasgow .

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StatementJonathan H. Manton ... [et al.].
SeriesEconomics discussion paper series / University of Glasgow, Department of Economics -- no.9806, Economics discussion paper (University of Glasgow, Department of Economics,Centre for Development Studies) -- no9806.
ContributionsManton, Jonathan H., University of Glasgow. Department of Economics.
ID Numbers
Open LibraryOL17288921M

Download Modelling stock market excess returns by Markov modulated Gaussian noise

Downloadable. A basic analysis of stock market excess return data shows both linear and non-linear dependence present. Previous papers have used this to argue that it must therefore be possible to predict future values.

However, this paper shows that the linear and non-linear dependence can be explained by simply allowing the mean and variance of Gaussian noise to be modulated by a (typically. Download Citation | Modelling Stock Market Excess Returns by Markov Modulated Gaussian Noise | A basic analysis of stock market excess return data shows both linear and non-linear dependence.

CiteSeerX - Document Details (Isaac Councill, Lee Giles, Pradeep Teregowda): A basic analysis of stock market excess return data shows both linear and non-linear dependence present.

Previous papers have used this to argue that it must therefore be possible to predict future values. However, this paper shows that the linear and non-linear dependence can be explained by simply allowing the mean.

Modelling stock market excess returns by Markov modulated Gaussian noise. By J.H. Manton, A. Muscatelli, V. Krishnamurthy and Glasgow Univ. (United Kingdom) Abstract. Available from British Library Document Supply Centre-DSC() / BLDSC - British Library Document Supply CentreSIGLEGBUnited Kingdo.

A Hidden Markov Model (HMM) is a specific case of the state space model in which the latent variables are discrete and multinomial the graphical representation, you can consider an HMM to be a double stochastic process consisting of a hidden stochastic Markov process (of latent variables) that you cannot observe directly and another stochastic process that produces a.

Modelling Stock Market Excess Returns by Markov Modulated Gaussian Noise. analysis of stock Modelling stock market excess returns by Markov modulated Gaussian noise book excess return data shows both linear and non-linear dependence present.

to a model of. Stock Market Forecasting Using Hidden Markov Model: A New Approach Md. Rafiul Hassan and Baikunth Nath Computer Science and Software Engineering The University of Melbourne, CarltonAustralia. {mrhassan, bnath}@ Abstract This paper presents Hidden Markov Models (HMM) approach for forecasting stock price for interrelated markets.

modeling non-trivial is the time dependence, volatility and other similar complex dependencies of this problem. To incorporate these, Hidden Markov Models (HMM's) have recently been applied to forecast and predict the stock market.

We present the Maximum a Posteriori HMM approach for forecasting stock values for the next day given historical data. Modelling Stock Market Excess Returns by Markov Modulated Gaussian Noise simply allowing the mean and variance of Gaussian noise to be modulated model.

Attempting to fit a Markov modulated. LI>J. Manton, A. Muscatelli, Vikram Krishnamurthy, S. Hurn, Modelling Stock Market Excess Returns by Markov Modulated Gaussian Noise, Discussion Papers in Economics NoDepartment of Economics, University of Glasgow, Markov chains are extremely useful in modeling a variety of real-world processes.

They’re commonly used in stock-market exchange models, in financial asset-pricing models, in speech-to-text recognition systems, in webpage search and rank systems, in thermodynamic systems, in gene-regulation systems, in state-estimation models, for pattern.

Learning Deep Latent Gaussian Models with Markov Chain Monte Carlo Matthew D. Hoffman1 Abstract Deep latent Gaussian models are powerful and popular probabilistic models of high-dimensional data.

These models are almost always fit using variational expectation-maximization, an approximation to true maximum-marginal-likelihood estimation. Manton, A. Muscatelli, Vikram Krishnamurthy, S. Hurn, Modelling Stock Market Excess Returns by Markov Modulated Gaussian Noise, Discussion Papers in Economics NoDepartment of Economics, University of Glasgow, Modelling Stock Market Excess Returns by Markov Modulated Gaussian Noise.

Stan Hurn; A basic analysis of stock market excess return data shows. We consider the valuation of European quanto call options in an incomplete market where the domestic and foreign forward interest rates are allowed to exhibit regime shifts under the Heath–Jarrow–Morton (HJM) framework, and the foreign price dynamics is exogenously driven by a regime switching jump-diffusion model with Markov-modulated Poisson processes.

Jonathan Manton & Anton Muscatelli & Vikram Krishnamurthy & Stan Hurn, "undated". "Modelling Stock Market Excess Returns by Markov Modulated Gaussian Noise," Working PapersBusiness School - Economics, University of Glasgow.

Portfolio Optimization with Markov-modulated stock prices and interest rates Nicole Bauerle and Ulrich Rieder¨ Abstract—A financial market with one bond and one stock is consid-ered where the risk free interest rate, the appreciation rate of the stock and the volatility of the stock depend on an external finite state Markov chain.

This study uses the hidden Markov model (HMM) to identify different market regimes in the US stock market and proposes an investment strategy that switches factor investment models depending on the current detected regime.

We first backtested an array of different factor models over a roughly year period from January to Septemberthen we trained the HMM on S&P ETF. Stock returns prediction, unlike traditional regression, requires consideration of both the sequential and interdependent nature of financial time-series.

This work uses a two-stage approach, using kernel adaptive filtering (KAF) within a stock market interdependence approach to sequentially predict stock returns. Gaussian Model to Trading. Standard deviation measures volatility and determines what performance of returns can be expected.

Smaller standard. is a Gaussian noise with mean zero and variance σ!. However, we assume that closing 94 prices in stock market are noise free because true prices are evaluated at closing time (Todd 95 & Correa, ).

The prior distribution of the observed target y is given by 96 y~!(0,K(X,X)), (2). Key Concept The Gauss-Markov Theorem for \(\hat{\beta}_1\). Suppose that the assumptions made in Key Concept hold and that the errors are OLS estimator is the best (in the sense of smallest variance) linear conditionally unbiased estimator (BLUE) in this setting.

Markov processes + Gaussian processes I Markov (memoryless) and Gaussian properties are di erent) Will study cases when both hold I Brownian motion, also known as Wiener process) Brownian motion with drift) White noise) Linear evolution models I Geometric brownian motion) Arbitrages) Risk neutral measures) Pricing of stock options (Black-Scholes).

Resources. YouTube Companion Video; A Markov Chain offers a probabilistic approach in predicting the likelihood of an event based on previous behavior (learn more about Markov Chains here and here). Past Performance is no Guarantee of Future Results If you want to experiment whether the stock market is influence by previous market events, then a Markov model is a perfect experimental tool.

Gaussian Markov random fields (Rue and Held, ) Let the neighbours N i to a point s i be the points {s j, j ∈ N i} that are “close” to s i. Gaussian Markov random field (GMRF) A Gaussian random field x ∼ N(μ,Σ)that satisfies p x i {x j:j 6= i} =p x i {x j:j ∈ N i} is a Gaussian Markov random field.

The simplest example of a. There could be a number of choices. See Fig. 2 by Box 3; a widely used one is the Sharpe ratio, which is originally suggested for evaluating the goodness of an asset in market by a ratio of the excess asset return (i.e., after minus the benchmark return) over the standard deviation of the excess asset return (Sharpe).

I would like to clarify two queries during training of Hidden Markov model. Excess Returns by Markov Modulated Gaussian Noise. analysis of stock market excess return data shows both linear.

will ever return to state (0,0). We are only going to deal with a very simple class of mathematical models for random events namely the class of Markov chains on a finite or countable state space. The state space is the set of possible values for the observations.

Thus, for the example above the state space consists of two states: ill and ok. model that flexibly accommodates non-normality, it has a micro foundation. The hidden Markov Gaussian mixture asset returns can be justified by a Lucas asset-pricing model (Lucas, ), where we slightly adapt the classic model by decomposing the exogenous productivity shocks into common and idiosyncratic components.

when driven by Gaussian white noise. The result is a basis function representation with piece-wise linear basis functions, and Gaussian weights with Markov dependences determined by a.

For instance, Bradley and Jansen () find that a range of threshold models fail to forecast US excess stock returns better than linear ones when the criterion is the RMSFE. Kilian and Taylor () have concluded that in forecasting nominal exchange rates, ESTAR models are superior to the random walk model, but only at long horizons, 2–3.

Optimality of State-Dependent (s, S) Policies in Inventory Models with Markov-Modulated Demand and Lost Sales Production and Operations Management, Vol.

8, Iss. 2, pp.10 Pages Posted: 1 May Last revised: 18 Jan The main aim of Hidden Markov Models: Applications to Financial Economics is to make such techniques available to more researchers in financial economics. excess return high variance state shocks returns transitory results arch probabilities coincident journal stock market probability of high   While there are various theories to account for the large variations in stock prices, some observed statistical aspects require further analysis.

A model is proposed for aggregate stock prices, based on observed data, rather than any efficient market hypothesis, and considering jumps in statistical parameters between phases of generally increasing, or generally decreasing, aggregate stock prices.

Model for non-Gaussian intraday stock returns 10 December | Physical Review E, Vol. 80, No. 6 A self-organising mixture autoregressive network for FX time series modelling and prediction.

Downloadable. A Hidden Markov Model for intraday momentum trading is presented which specifies a latent momentum state responsible for generating the observed securities' noisy returns. Existing momentum trading models suffer from time-lagging caused by the delayed frequency response of digital filters.

Time-lagging results in a momentum signal of the wrong sign, when the market changes trend. Studies of Markov-modulated regime switching models have been well-documented.

This project extends that notion to a class of semi-Markov processes known as age-dependent processes. We also allow for time-dependence in volatility within regimes.

We show that the problem of option pricing in such a market is equivalent to solving a certain. Gaussian Processes training and out of sample forecasting performance.

The last section is reserved for conclusion. VOLATILITY MODELING A. Parametric models Let 2 ç be stock price at time P. Then U ç L H J 2 ç F H J 2 ç. 5 ; (1) denotes the continuously compounded daily returns of the underlying assets at time P.

() Conditionally Gaussian random sequences for an integrated variance estimator with correlation between noise and returns. Applied Stochastic Models in Business and Industry() Continuous-time reinforcement learning. Gaussian Markov Processes Particularly when the index set for a stochastic process is one-dimensional such as the real line or its discretization onto the integer lattice, it is very interesting to investigate the properties of Gaussian Markov processes (GMPs).

In this Appendix we use X(t) to define a stochastic process with continuous time pa. Markov processes + Gaussian processes I Markov (memoryless) and Gaussian properties are di↵erent) Will study cases when both hold I Brownian motion, also known as Wiener process I Brownian motion with drift I White noise) linear evolution models I Geometric brownian motion) pricing of stocks, arbitrages, risk neutral measures, pricing of stock options (Black-Scholes).According to the efficient market hypothesis, without considering market manipulation, we can think that changes in stock prices are only related to the state of the stock market, that is, the current stock market information can represent the historical information in the stock market, which is consistent with the hidden Markov model assumption.Cite this chapter as: Lichters R., Stamm R., Gallagher D.

() Linear Gauss Markov Model. In: Modern Derivatives Pricing and Credit Exposure Analysis.

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