Estimating system response to a regime shift: some evidence on international asset pricing

Abstract

In this paper we try to assess how a weighted shares index and corresponding futures index respond to a change in the short‐term interest rate. Three methods are applied in analysing the data: an error correction regression method, a state space method and a neural network method. Results indicate presence of cointegration in the data set. A sensitivity analysis of each model was carried out by studying the evolution of the predictions after the studied time period, using deterministic values of the inputs. An analysis of the influence of an interest rate shock yielded interesting results. In the neural network model, again, more complicated response patterns were observed.