An Econometric Analysis of Some Models for Constructed Binary Time Series

Don Harding and Adrian Pagan

No 39, NCER Working Paper Series from National Centre for Econometric Research

Abstract: Macroeconometric and financial researchers often use secondary or constructed binary random variables that differ in terms of their statistical properties from the primary random variables used in micro-econometric studies. One important difference between primary and secondary binary variables is that, while the former are, in many instances, independently distributed (i.d.), the latter are rarely i.d. We show how popular rules for constructing the binary states interact with the stochastic processes for of the variables they are constructed from, so that the binary states need to be treated as Markov processes. Consequently, one needs to recognize this when performing analyses with the binary variables, and it is not valid to adopt a model like static Probit which fails to recognize such dependence. Moreover, these binary variables are often censored, in that they are constructed in such a way as to result in sequences of them possessing the same sign. Such censoring imposes restrictions upon the DGP of the binary states and it creates difficulties if one tries to utilize a dynamic Probit model with them. Given this we describe methods for modeling with these variables that both respects their Markov process nature and which explicitly deals with any censoring constraints. An application is provided that investigates the relation between the business cycle and the yield spread.

Keywords: Business cycle; binary variable, Markov process, Probit model, yield curve (search for similar items in EconPapers)
JEL-codes: C22 C53 E32 E37 (search for similar items in EconPapers)
Pages: 31
Date: 2009-01-21, Revised 2009-07-02
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-mac and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: An Econometric Analysis of Some Models for Constructed Binary Time Series (2011)
Journal Article: An Econometric Analysis of Some Models for Constructed Binary Time Series (2011)
Working Paper: An econometric analysis of some models for constructed binary time series (2009)
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