This paper employs a parametric model of persistent (level) shifts in the conditional mean of stock market returns which are endogenously driven by large positive or negative return shocks. These shocks can be taken to reflect important market announcements, monetary policy regime changes and/or...

This paper explains the contradictory findings from long-run and short-run tests of the rational expectations hypothesis of the term structure. Recent research suggests that, while the long-run tests support the theory, the short-run tests do not. Our results which are based on US Treasury bills...

Panel data unit root tests which allow for a common structural break in the individual effects or linear trends of the AR(1) panel data model are suggested. These allow the date of the break to be unknown. The tests assume that the time-dimension of the panel (T) is fixed (finite) while the...

We extend Breitung’s (2000) panel data unit root test to the case of fixed time (T) dimension while still allowing for heteroscedastic and serially correlated error terms. The analytic local power function of the new test is derived assuming that only the cross section dimension of the panel...

In this paper we develop a discrete-time pricing model for European options where the log-return of the underlying asset is subject to discontinuous regime shifts in its mean and/or volatility which follow a Markov chain. The model allows for multiple regime shifts whose risk cannot be hedge out...