EconPapers    
Economics at your fingertips  
 

Adding Flexibility to Markov Switching Models

Edoardo Otranto ()

Working Paper CRENoS from Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia

Abstract: Very often time series are subject to abrupt changes in the level, which are generally represented by Markov Switching (MS) models, hypothesizing that the level is constant within a certain state (regime). This is not a realistic framework because in the same regime the level could change with minor jumps with respect to a change of state; this is a typical situation in many economic time series, such as the Gross Domestic Product or the volatility of financial markets. We propose to make the state flexible, introducing a very general model which provides oscillations of the level of the time series within each state of the MS model; these movements are driven by a forcing variable. The flexibility of the model allows for consideration of extreme jumps in a parsimonious way (also in the simplest 2-state case), without the adoption of a larger number of regimes; moreover this model increases the interpretability and fitting of the data with respect to the analogous MS model. This approach can be applied in several fields, also using unobservable data. We show its advantages in three distinct applications, involving macroeconomic variables, volatilities of financial markets and conditional correlations.

Keywords: abrupt changes; goodness of fit; Hamilton filter; smoothed changes; time–varying parameters (search for similar items in EconPapers)
JEL-codes: C5 C32 C22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-ore
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
http://crenos.unica.it/crenos/node/6529
http://crenos.unica.it/crenos/sites/default/files/WP15-09.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:cns:cnscwp:201509

Access Statistics for this paper

More papers in Working Paper CRENoS from Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia Contact information at EDIRC.
Bibliographic data for series maintained by Antonello Pau ().

 
Page updated 2019-04-19
Handle: RePEc:cns:cnscwp:201509