Markov Switching Models in Empirical Finance

I review the burgeoning literature on applications of Markov regime switching models in empirical finance. In particular, distinct attention is devoted to the ability of Markov Switching models to fit the data, filter unknown regimes and states on the basis of the data, to allow a powerful tool to test hypotheses formulated in light of financial theories, and to their forecasting performance with reference to both point and density predictions. The review covers papers concerning a multiplicity of subfields in financial economics, ranging from empirical analyses of stock returns, the term structure of default-free interest rates, the dynamics of exchange rates, as well as the joint process of stock and bond returns.