Financial Crises and Stock Market Indices: Markov Switching Approach

This paper investigates the effects of macroeconomic variables on stock indices of three nations from a financial crisis viewpoint. Both the OLS and the Markov regime switching approaches are applied on real GDP, the interest rate, aggregate money supply, exchange rate, and unemployment rate for Thailand, Malaysia, and the U.S. from 1997 to 2010. The Markov approach yields improved regression results, more than the deterministic OLS dummy variable approach. Findings from the Markov approach suggest that the Malaysian KLCI index responded most significantly to all crisis-related macro-dummies except GDP. The Thailand SET index correlated significantly only with interest rate and money supply. In the U.S. the interest rate crisis-related dummy exerts no statistically significant effect on the DJIA index.