The cost of carry model and regime shifts in stock index futures markets: An empirical investigation

A Markov regime switching approach for hedging energy commodities

“…The statistic follows a v 2 (1) since these two states can be associated with periods of low and high volatility. On the other hand, Sarno and Valente (2000) use a three-state process to model spot-futures relationship in stock indices; nonetheless, in their study the third state seems to capture only jumps in the futures prices at the time of switching between contracts of different maturities and does not reflect fundamental changes in market conditions. Table 2 presents the single and two regime GARCH models.…”

“…In addition, they find that in a high variance regime a negative basis is more likely to increase the regime persistence than a positive basis and associate volatility regimes with specific market events. Sarno and Valente (2000) provide a further dimension to the literature using a multivariate extension of the markov regime switching (MRS) model proposed by Hamilton (1989) and Krolzig (1999). They find that the relationship between spot and futures is regime dependent and MRS models can explain this relationship better than simple linear models.…”

A dynamic model of hedging and speculation in the commodity futures markets

“…14 < INSERT TABLE 5 ABOUT HERE > 5. Hedging, speculation, and futures pricing regime shifts Sarno and Valente (2000) and Alizadeh and Nomikos (2004) analyzed the changes in the relationship between futures and spot stock index returns using a Markov-switching model set out originally by Hamilton (1994). This technique is used here in order to analyze the shifts over two regimes in hedging and speculative behavior.…”

Non-Linear Trade Off between Risk and Return: A Regime-Switching Multi-Factor Framework

“…The mean equation specification in this model is 2 , , 10 8 Previous studies considering three states (e.g., Sarno and Valente 2000) show that the third state only reflects odd jumps in the return series.The explanatory power of the third state is low and it is worthless in light of the difficulties of the estimation process that it produces. 9 We also estimate a restricted model where 21…”