Markov Switching Regimes say... bear or bullish? - Quantdare

We are going to introduce the Markov Switching Regimes (MSR) model which, as its name indicates, tries to capture when a regimen has changed to another one. This would be a change between opposite trends or it could consist in passing from "being in trend" to "not being in trend" and vice versa. The name of Markov could sound familiar to some of you as j3 introduced what the Markov chains were a couple of years ago. The main characteristic of this stochastic process is that in a stage t, the probability of occurrence only depends on what happened in the immediately previous stage, t-1. In our post we will assume that the trend of an index today will depend only on which trend was living yesterday, this means, the index will be governed by a Markov chain.