Wavelet improvement in turning point detection using a Hidden Markov Model

Yushu Li and Simon Reese ()
Additional contact information
Simon Reese: Dept. of Economics, School of Economics and Management, Lund University, Postal: Lund University, School of Economics and Management, Department of Economics, Box 7082, SE-22007 Lund, Sweden, http://www.lu.se/lucat/user/6b25cc88979b9c47f95ecac87def97bb

No 2014/10, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

Abstract: The Hidden Markov Model (HMM) has been widely used in regime classification and turning point detection for econometric series after the decisive paper by Hamilton (1989). The present paper will show that when using HMM to detect the turning point in cyclical series, the accuracy of the detection will be influenced when the data are exposed to high volatilities or combine multiple types of cycles that have different frequency bands. Moreover, outliers will be frequently misidentified as turning points. The present paper shows that these issues can be resolved by wavelet multi-resolution analysis based methods. By providing both frequency and time resolutions, the wavelet power spectrum can identify the process dynamics at various resolution levels. We apply a Monte Carlo experiment to show that the detection accuracy of HMMs is highly improved when combined with the wavelet approach. Further simulations demonstrate the excellent accuracy of this improved HMM method relative to another two change point detection algorithms. Two empirical examples illustrate how the wavelet method can be applied to improve turning point detection in practice.

Keywords: HMM; turning point; wavelet; wavelet power spectrum; outlier (search for similar items in EconPapers)
JEL-codes: C22 C38 C63 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2014-03-25
New Economics Papers: this item is included in nep-cmp, nep-ets, nep-ger and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/11250/194974 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://hdl.handle.net/11250/194974 [302 Found]--> https://www.unit.no/brage-denne-lenken-er-ikke-lenger-gyldig [301 Moved Permanently]--> https://sikt.no/brage-denne-lenken-er-ikke-lenger-gyldig)

Related works:
Working Paper: Wavelet Improvement in Turning Point Detection using a Hidden Markov Model (2014)
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:hhs:nhhfms:2014_010

Access Statistics for this paper

More papers in Discussion Papers from Norwegian School of Economics, Department of Business and Management Science NHH, Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway. Contact information at EDIRC.
Bibliographic data for series maintained by Stein Fossen ().