BFS 2002

Contributed Talk

Smooth transition regression models in UK stock returns

Nektarios Aslanidis, Denise Osborn, Marianne Sensier

This paper models UK stock market returns in a smooth transition regression (STR) framework. We employ a variety of financial and macroeconomic series that are assumed to influence UK stock returns, namely GDP, interest rates, inflation, money supply and US stock prices. We estimate STR models where the linearity hypothesis is strongly rejected for at least one transition variable. These non-linear models describe the in-sample movements of the stock returns series better than the corresponding linear model. Moreover, the US stock market appears to play an important role in determining the UK stock market returns regime.