Combining a regression model with a multivariate Markov chain in a forecasting problem

Bruno Damásio and João Nicolau

Statistics & Probability Letters, 2014, vol. 90, issue C, 108-113

Abstract: This paper proposes a new concept: the usage of Multivariate Markov Chains (MMC) as covariates. Our approach is based on the observation that we can treat possible categorical (or discrete) regressors, whose values are unknown in the forecast period, as an MMC in order to improve the forecast error of a certain dependent variable. Hence, we take advantage of the information about the past state interactions between the MMC categories to forecast the categorical (or discrete) regressors and improve the forecast of the actual dependent variable.

Keywords: Multivariate Markov chain; Higher-order Markov chain; Forecasting (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1016/j.spl.2014.03.026

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