ON THE PREDICTIVE PERFORMANCE OF THE STOCK RETURNS BY USING THE MARKOV-SWITCHING MODELS

Sammanfattning: This paper proposes the basic predictive regression and Markov Regime-Switching regression to predict the excess stock returns in both US and Sweden stock markets. The analysis shows that the Markov Regime-Switching regression models out perform the linear ones in out-of-sample forecasting, which is due to the fact that the regime-switching models capture the economic expansion and recession better.