Markov-switching three-pass regression filter

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

No 1748, Working Papers from Banco de España

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 fi lter to settings where parameters can vary according to Markov processes. The new method, denoted as Markov-switching three-pass regression fi lter (MS-3PRF), is suitable for data sets 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 fi nd 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: factor model; Markov-switching; forecasting (search for similar items in EconPapers)
JEL-codes: C22 C23 C53 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2017-12
New Economics Papers: this item is included in nep-ets and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.bde.es/f/webbde/SES/Secciones/Publicac ... /17/Fich/dt1748e.pdf First version, December 2017 (application/pdf)

Related works:
Journal Article: Markov-Switching Three-Pass Regression Filter (2020)
Working Paper: Markov-Switching Three-Pass Regression Filter (2017)
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:bde:wpaper:1748

Access Statistics for this paper

More papers in Working Papers from Banco de España Contact information at EDIRC.
Bibliographic data for series maintained by Ángel Rodríguez. Electronic Dissemination of Information Unit. Research Department. Banco de España ().