Daily Archives: Oct 6, 2016 at 07:33 am EDT

Modeling Stock-Market Regime Shift… Carefully And Selectively

Ilya Kipnis at QuantStrat TradeR reminds us that the Hidden Markov Model (HMM), which can be a powerful tool for detecting regime change in markets and macro, has its limitations and pitfalls. In particular, Kipnis reports that HMM’s value as a prediction tool for the stock market is dubious. That’s not surprising. Predicting, after all, is always difficult bordering on impossible. But all’s not lost. HMM is still quite useful as a framework for providing relatively objective and reliable signals on the current regime state for equities. A solid forecast would be preferable, of course, but mere mortals have to take what they can get.
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