Markov-Switching Three-Pass Regression Filter

Pierre Guérin, Danilo Leiva-Leon () and Massimiliano Marcellino

Staff Working Papers from Bank of Canada

Abstract: We introduce a new approach for the estimation of high-dimensional factor models with regime-switching factor loadings by extending the linear three-pass regression filter to settings where parameters can vary according to Markov processes. The new method, denoted as Markov-switching three-pass regression filter (MS-3PRF), is suitable for datasets with large cross-sectional dimensions, since estimation and inference are straightforward, as opposed to existing regime-switching factor models where computational complexity limits applicability to few variables. In a Monte Carlo experiment, we study the finite sample properties of the MS-3PRF and find that it performs favourably compared with alternative modelling approaches whenever there is structural instability in factor loadings. For empirical applications, we consider forecasting economic activity and bilateral exchange rates, finding that the MS-3PRF approach is competitive in both cases.

Keywords: Econometric; and; statistical; methods (search for similar items in EconPapers)
JEL-codes: C22 C23 C53 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2017
New Economics Papers: this item is included in nep-ore
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https://www.bankofcanada.ca/wp-content/uploads/2017/04/swp2017-13.pdf

Related works:
Journal Article: Markov-Switching Three-Pass Regression Filter (2020)
Working Paper: Markov-switching three-pass regression filter (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:17-13

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