Modeling local trends with regime shifting models with time-varying probabilities

Predictability of bull and bear markets: A new look at forecasting stock market regimes (and returns) in the US

“…Second, we emphasize the benefits of MS models with principal components and TVTP. Although MS models with time-varying transitions have been developed more than 25 years ago (Diebold et al 1994), there are only a handful of examples that apply these models in the context of bull and bear markets (e.g., Schaller and Norden 1997;Maheu and McCurdy 2000;Guidolin and Hyde 2012;Kole and van Dijk 2017;Focardi et al 2019). The few existing papers that include macro-financial variables in the transition equation provide rather disappointing results.…”