Regime switching in the presence of endogeneity

Tingting Cheng (), Jiti Gao and Yayi Yan

No 9/18, Monash Econometrics and Business Statistics Working Papers from Monash University, Department of Econometrics and Business Statistics

Abstract: In this paper, we propose a state-varying endogenous regime switching model (the SERS model), which includes the endogenous regime switching model by Chang et al. (2017), the CCP model, as a special case. To estimate the unknown parameters involved in the SERS model, we propose a maximum likelihood estimation method. Monte Carlo simulation results show that in the absence of state-varying endogeneity, the SERS model and the CCP model have similar performance, while in the presence of state-varying endogeneity, the SERS model performs much better than the CCP model. Finally, we use the SERS model to analyze the China stock market returns and our empirical results show that there exists strongly state-varying endogeneity in volatility switching for the Shanghai Composite Index returns. Moreover, the SERS model can indeed produce a much more realistic assessment for the regime switching process than the one obtained by the CCP model.

Keywords: latent factor; maximum likelihood estimation; Markov chain; regime switching models; state-varying endogeneity. (search for similar items in EconPapers)
JEL-codes: C22 C32 (search for similar items in EconPapers)
Pages: 28
Date: 2018
New Economics Papers: this item is included in nep-ecm and nep-ore
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.monash.edu/business/ebs/research/publications/wp09-2018.pdf (application/pdf)

Related works:
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:msh:ebswps:2018-9

Ordering information: This working paper can be ordered from
http://business.mona ... -business-statistics

Access Statistics for this paper

More papers in Monash Econometrics and Business Statistics Working Papers from Monash University, Department of Econometrics and Business Statistics PO Box 11E, Monash University, Victoria 3800, Australia. Contact information at EDIRC.
Bibliographic data for series maintained by Professor Xibin Zhang ().