Page 211 - Special Topic Session (STS) - Volume 1

STS425 Nur I. et al.

On monitoring stock price movements using
Markov Switching Model
NUR Iriawan , Wiwik Prihartanti
1
2
1 Department of Statistics, Faculty of Mathematics, Computing, and Data Science, Institut
Teknologi Sepuluh Nopember, 60111 Surabaya, Indonesia.
2 Department of Business Administration, Faculty of Social and Political Science, Universitas
WR Supratman, 60111 Surabaya, Indonesia.

Abstract
Stock price movements and interest rate fluctuations have always been the
attention of investors in the capital market. Lower interest rates will reduce
interest in investment instruments in banks. That way, investment instruments
in the capital market will be more attractive and much in demand. Optimal
modeling that can help monitor stock price movements, therefore, is needed.
One of them is the proposed Markov Switching model, which can be coupled
with the first step analysis to detect the price change patterns. Then, in turn,
the average run length that the price will stay at the same price can be
calculated. A combination of the probability switching pattern and the average
run length can be used as a basis for determining the predicted price of the
stock later. The combination of these two methods, furthermore, will further
sharpen the ability of investors to place their investments in a more profitable
position.

Keywords
Markov Switching Model, EM Algorithm, Regime model, probability switching
pattern, Average Run Length

1. Introduction
The main measure of transaction liquidity is the value of transactions in
the regular market. This measurement is always developed to sharpen the
criteria for stock liquidity, including measuring the number of trading days and
the frequency of transactions into this measure of liquidity. The movement of
stock prices is often also used as a way of supporting in seeing transaction
liquidity. LQ45 is one index made by the Indonesia Stock Exchange (IDX). This
index comes from the calculation of 45 issuers which meet the criteria for
assessing liquidity and taking into account market capitalization. The list of
shares is periodically updated every six months, namely the period August-
January and February-July. Stocks that have a good performance in meeting
the LQ45 liquidity criteria will be selected to enter the list of shares in LQ45
replacing stocks whose performance has declined and does not meet the
criteria for liquidity. This is due to, among others, the influence of changes in

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