Conditional Markov chain and its application in economic time series analysis

Jushan Bai and Peng Wang

MPRA Paper from University Library of Munich, Germany

Abstract: Motivated by the great moderation in major U.S. macroeconomic time series, we formulate the regime switching problem through a conditional Markov chain. We model the long-run volatility change as a recurrent structure change, while short-run changes in the mean growth rate as regime switches. Both structure and regime are unobserved. The structure is assumed to be Markovian. Conditioning on the structure, the regime is also Markovian, whose transition matrix is structure-dependent. This formulation imposes interpretable restrictions on the Hamilton Markov switching model. Empirical studies show that this restricted model well identifies both short-run regime switches and long-run structure changes in the U.S. macroeconomic data.

Keywords: Markov regime switching; Conditional Markov chain (search for similar items in EconPapers)
JEL-codes: C01 C22 C32 (search for similar items in EconPapers)
Date: 2011-08
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-ore
References: Add references at CitEc
Citations: View citations in EconPapers (18)

Published in Journal of Applied Econometrics 5.26(2011): pp. 715-734

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/33369/1/MPRA_paper_33369.pdf original version (application/pdf)

Related works:
Journal Article: Conditional Markov chain and its application in economic time series analysis (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:33369

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().