Abstract
This article focuses on the asset price volatility at the stock exchange that result from the regime switching behaviour in the market. This study is devoted to the question about how the asset price volatility affects the US sovereign debt market. The efficient market hypothesis has been a base for the asset pricing. This hypothesis is discussed in this study. The review of the literature reveals nuances of behavioural finance theory, and allows us to better understand the regime switching behaviour in the market. The object of empirical study is the US sovereign debt market. We use the Markov Regime-Switching ARCH (SWARCH) model to analyse data. The results show that there is high volatility regime in both the 2012 and 2017 bonds US market, which significantly affects bond prices.
Highlights
IntroductionTeparticularquestionthatourresearchrevolvesaroundis:‘Doesvolatilityfollowa regime-switchingtrendinthesovereigndebtmarket?’AccordingtoBlanchardand Watson (1982),Evans(1991)andmorerecentlyBranchandEvans(2011)andDajcman(2015),a periodiccollapsingbubblecanbeanalysedusinga Markovswitching model.
Downloadedby[UniversityofEastLondon]at08:0904January2018 marketparticipants makingrandomtransactionsinthe marketcanonlybeadequately explainedbytakingaccountofbehaviouralfactors.AsdiscussedbyBarberisand Taler (2003),theimpactonthepricefromtheseirrationalmarketparticipantscanbelong-lasting andsignifcant.AccordingtoBarberisand Taler(2003),thepsychologyandthelong-lastingimpactofirrationalmarketparticipantsformthebuildingblocksofbehaviouralfnance.
(2008)andStatman(2008),behaviouralfnanceisthepsychologicalstudyofthe market participantsandtheirinteractionwiththefnancialmarketswherethemarketparticipants maybeindividualhouseholdsororganisations.,DeBondtetal.(2008)stated thatthebehaviouralfnancetheoryisnotnecessarilybasedontheassumptionofrational marketparticipantsandefcientmarkets.Animportantfactorinthebehaviouralfnance theoryasindicatedbyStatman(2008),isthat marketparticipantsareassumedtobehave normalinthesensethattheyactrationalbutwithalimitedinformationset.
Summary
Teparticularquestionthatourresearchrevolvesaroundis:‘Doesvolatilityfollowa regime-switchingtrendinthesovereigndebtmarket?’AccordingtoBlanchardand Watson (1982),Evans(1991)andmorerecentlyBranchandEvans(2011)andDajcman(2015),a periodiccollapsingbubblecanbeanalysedusinga Markovswitching model. Downloadedby[UniversityofEastLondon]at08:0904January2018 marketparticipants makingrandomtransactionsinthe marketcanonlybeadequately explainedbytakingaccountofbehaviouralfactors.AsdiscussedbyBarberisand Taler (2003),theimpactonthepricefromtheseirrationalmarketparticipantscanbelong-lasting andsignifcant.AccordingtoBarberisand Taler(2003),thepsychologyandthelong-lastingimpactofirrationalmarketparticipantsformthebuildingblocksofbehaviouralfnance. (2008)andStatman(2008),behaviouralfnanceisthepsychologicalstudyofthe market participantsandtheirinteractionwiththefnancialmarketswherethemarketparticipants maybeindividualhouseholdsororganisations.,DeBondtetal.(2008)stated thatthebehaviouralfnancetheoryisnotnecessarilybasedontheassumptionofrational marketparticipantsandefcientmarkets.Animportantfactorinthebehaviouralfnance theoryasindicatedbyStatman(2008),isthat marketparticipantsareassumedtobehave normalinthesensethattheyactrationalbutwithalimitedinformationset. TislendsitselftotheoverreactionhypothesisassuggestedbyBarberis,Shleifer,and Vishny(1998),Daniel, Hirshleifer,andSubrahmanyam(1998), HongandStein(1999) andDeBondt(2000).,itleadstotheexistenceofbubbles,whichcausesthe assetpricetotemporarydeviatefromthefundamentalvalueintheshorttomediumterm asillustratedbyKindlebergerandAliber(2005).Blanchardand Watson(1982),defned abubbleasapricedeviationfromthefundamentalvaluethatisapparentlyunjustifedby theinformationavailableatthetime. 3.TheMarkovRegime-SwitchingARCHModel Terecentfnancialandsovereigndebtcriseshavecertainlyresultedinuplifintheempiricalstudiesofthe Markovswitching modelinthesovereigndebt market.Someofthe relevantstudiesareconductedbyGeorgoutsosand Migiakis(2009,2010,2012);Pozzi andSadaba(2013);andSchusterandUhrig-Homburg(2012);Yıldırım(2015); Marieta (2014). Hamilton(1988)conductedresearchonmonthlyshort-terminterestratesandconcluded thepossiblepresenceofregimeshifsinARCHefectscouldexplaintheestimatesofthe ARCH-mofEngleetal.(1987).Infact,acommonproblemintheestimationofARCH/ GARCHisspuriouslyhighpersistentofvolatilityacrosssubsamplesasstatedbyHamilton andSusmel(1994).,sometimessimpleARCH/GARCH modelsdonotentirely explainvolatility;,acombinationoftheregime-switchingcapabilitiesofthe MS modelwithconditionalvolatility modelssuchasARCH/GARCHisneeded.Asnotedby Cai(1994),akeyfactorintheuseofSWARCHistheindigenisationofparametershifs, thusallowingshifstobedeterminedbytheobserveddataset.,akeyadvantageisthatitdistinguishesbetweentheefectsenablingtheanalysisoftheirimpactonthe propertiesoftheobserveddataset. TeliteratureontheempiricalevidenceofSWARCH modelinsovereigndebt marketislesserwhencomparedwithother models.Christiansen(2008),conductedresearch bySWARCHimplementationontheyieldsusingthe Cai(1994) method. Abdymomunov(2013)appliedSWARCHusingtheHamiltonandSusmel(1994)method tostudythereturns.,Christiansen(2008)extendedtheCai(1994)implementationoftheSWARCHmodeltoabivariatemodelinordertoestimatethevolatilitiesofUS andUKandUSandGermanmarketssimultaneously.Abdymomunov(2013)extendsthe HamiltonandSusmel(1994)modeltoamultivariateSWARCHmodeltostudytheimpact offnancialdistressfromhugechangesinthevolatilityofkeyfnancialvariablesonthe USfnancial marketandfoundthatthejointvariablesregime-switching modelcouldbe apossibleindicatoroffnancialdistress.AspointedoutbyBlanchardand Watson(1982) andBranchandEvans(2011,2013),apossiblemethodofinterpretingbehaviouralfnance isusingtheGARCHfamily. AsHamiltonnotes,volatilityseemtobefollowingahigh-lowswitchingmodel, andthereisalackofevidencetotheSWGARCH(i.e.,SwitchingGARCH)models.Dueto issuesregardingthecomplexity(seeCai,1994;Guidolin,2012),andthehighpersistency inthevolatility(seeGuidolin,2012);wefollowChristiansen(2008)andAbdymomunov (2013)inusingaSWARCH modelinsteadofaSWGRACH,withtheARCH modelof Engle(1982)toderivethevolatility. TeSWARCHmodelisstatedbelow: ht=휔0+ 휔1st+ ∑q 훼i2 t휀−i i=1. TepersistenceofthehighvolatilityregimeduringtheearlystagesoftheUS market observationswastheresultofafightfromthefnancialassetstotheUS marketduring thefnancialcrisis.SincethefnancialcrisishaditsoriginintheUS;,thesefights tosafetysignifcantlyafectedtheUS market.,thetimingsofthetwohikesin volatilityduringthesovereigndebtcrisisperiodseemtobehintingattheeurozonesovereigndebtcrisis,henceaplausibleexplanationisthattheUSmarketwasatthecentreofa fightfromtheeurototheUSdollar.Itmustberememberedthatduetolimitationswith theestimationoftheSWARCHmodel,wehadtolimitourobserveddatasetto1October 2012,which meantthefullimpactoftheUSfscalclif,anddebt-ceilingcrisesontheUS market was not captured
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