Contents
Dedication v
Acknowledgments xi
List of Figures xiii
List of Tables xvii
1. INTRODUCTION
1
1 Introduction 1
2 MarkovChains 1
3 Passage Time 5
4 Markov Chains and the Term Structure of Interest Rates 6
5 State Space Methods and Kalman Filter 11
6 Hidden Markov Models and Hidden Markov Experts 13
7 HMM Estimation Algorithm 16
8 HMM Parameter Estimation 18
9 HMM Most Probable State Sequence: Viterbi Algorithm 22
10 HMM Illustrative Examples 24
2. VOLATILITY IN GROWTH RATE
OF REAL GDP 29
1 Introduction 29
2 Models 31
2.1 GARCH Model 31
2.2 Markov Switching Variance Model 32
3 Data 33
4 Empirical Results 33

5 Conclusion 38
3. LINKAGES AMONG G7
STOCK MARKETS 41
1 Introduction 41
2 Empirical Technique 44
2.1 Markov Switching Stock Return Model 44
2.2 Concordance Measure 45
3 Data 46
4 Empirical Results 46
5 Conclusion 51
4. INTERPLAY BETWEEN INDUSTRIAL
PRODUCTION AND STOCK MARKET 55
1 Introduction 55
2 Markov Switching Heteroscedasticity Model of Output
and Equity 58
3 Data 62
4 Empirical Results 63
5 Conclusion 76
5. LINKING INFLATION AND
INFLATION UNCERTAINTY 81
1 Introduction 81
1.1 Inflation and Inflation Uncertainty 81
1.2 Inflation Uncertainty and Markov Switching
Model 83
2 Empirical Technique 85
2.1 Markov Switching Heteroscedasticity Model of the
Inflation Rate 85
2.2 Non-Nested Model Selection using Vuong Statistic 86
3 Data 87
4 Empirical Results 91
5 Conclusion 107
6. EXPLORING PERMANENT AND
TRANSITORY COMPONENTS
OF STOCK RETURN 117
1 Introduction 117

2 Markov Switching Heteroscedasticity Model of Stock
Return 119
3 Data 120
4 Empirical Results 121
5 Conclusion 125
7. EXPLORING THE RELATIONSHIP
BETWEEN COINCIDENT FINANCIAL
MARKET INDICATORS 127
1 Introduction 127
2 Markov Switching Coincidence Index Model 129
3 Data 131
4 Empirical Results 131
5 Conclusion 139
References 145
Index 153