Estimating system response to a regime shift - Some evidence on international asset pricing

In this paper we try to assess here how a weighted shares index and corresp onding futures index respond to a change in the short term interest rate. T hree methods are applied in analysing the data: an error correction regress ion method, a state space method and a neural network method. Results indic ate presence of cointegration in the data set. A sensitivity analysis of ea ch model was carried out by studying the evolution of the predictions after the studied time period using deterministic values of the inputs. An analy sis of the influence of an interest rate shock yielded interesting results. In the neural network model, again, more complicated response patterns wer e observed.