Stock Market Returns of Indian Stock Markets: A Markov Regime Switching Auto Regressive Approach

Abstract: The stock market exhibits inefficiencies by giving abnormal returns which is a deviation from market efficiency where prices reflect all the available information. The recent research has unfolded many irregularities of market caused by behavioural aspects. This research attempts to model and forecast stock markets of India; Nifty and Sensex by employing Markov Regime Switching Auto Regressive Model (MS-AR). The MS-AR model attempts to establish bull and bear; two state Markov regime for both the Indian markets to capture the regime shifts behaviour in the Indian Stock Market. Keywords: Markov Switching Regime, Regime Shift, Stock Return, Nifty, Sensex JEL Classification Number: C22, G10, G12