Distribution switching of stock returns: international evidence

Abstract

This article considers six alternative models–the normal model, normal model with parameter change, t model, t model with parameter change, normal and t model and the t and normal model–and the best model is selected using the Bayesian information criterion. The simulation results suggest that the proposed method works well with regard to all the models, with the exception of the t model with parameter change, which is sometimes unidentified. Empirical results show that in two out of the six countries, the monthly time series of stock returns are generated from the normal distribution before the switch point and from the t distribution after the switch point. Both the switch points are caused by international economic crises such as the turmoil in the international monetary system in 1971 or the oil shock of 1974.