Long Memory and Regime Switching

Francis Diebold and Atsushi Inoue

No 264, NBER Technical Working Papers from National Bureau of Economic Research, Inc

Abstract: The theoretical and empirical econometric literatures on long memory and regime switching have evolved largely independently, as the phenomena appear distinct. We argue, in contrast, that they are intimately related, and we substantiate our claim in several environments, including a simple mixture model, Engle and Lee's (1999) stochastic permanent break model, and Hamilton's (1989) Markov switching model. In particular, we show analytically that stochastic regime switching is easily confused with long memory, even asymptotically, so long as only a small' amount of regime switching occurs, in a sense that we make precise. A Monte Carlo analysis supports the relevance of the theory and produces additional insights.

JEL-codes: C12 C13 (search for similar items in EconPapers)
Date: 2000-11
Note: TWP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (44)

Published as Diebold, Francis X. and Atsushi Inoue. "Long Memory And Regime Switching," Journal of Econometrics, 2001, v105(1,Nov), 131-159.

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