In this article, we derive an alternative estimation algorithm for the innovation regime-switching model, which avoids the potential divergence problem that may arise from the algorithm proposed by Kuan et al. (2005, JBES). Our simulation demonstrates that the proposed algorithm compares...

In this article, we apply the innovation regime-switching model, recently proposed by Kuan et al. (2005, JBES), to identify turbulent and calm regimes in stock prices. Based on the predictions of both regimes, we construct simple trading rules and investigate their profitability. Our results...