Determinants of stock market classifications

ABSTRACT

We use discriminant analysis to describe and predict market classifications. Potential discriminators are derived from relevant characteristics of market indices, in particular from the returns’ volatility. Using a training data set, an initial screening on the predictors is carried out and a model-based simple rule is constructed with 96.6% of correct classifications. 10 new markets are allocated to one of the previously defined groups: Developed, Emerging, or Frontier, with only one misclassification. The quantitative approach was able to anticipate classification reviews.

KEYWORDS:

• Discriminant analysis
• developed
• emerging
• frontier markets
• GARCH models

JEL CLASSIFICATION:

• C32
• C51
• G15

Disclosure statement

No potential conflict of interest was reported by the authors.