Charts as signals in Markov switching world

Abstract

This note evaluates the signal performance of charts under the maintained assumption that the DGP is a standard Markov switching model. It is found that, within this framework, charts contain valuable information with respect to the current state of the latent process. Hence, this note provides a (statistical) rationale for the reported profitability of chartists rules in terms of an underlying Markov switching model as the DGP.