Modeling and Estimation of Synchronization in Multistate Markov-Switching Models

Cem Çakmaklı, Richard Paap and Dick van Dijk

No 11-002/4, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This paper develops a Markov-Switching vector autoregressive model that allows for imperfect synchronization of cyclical regimes in multiple variables, due to phase shifts of a single common cycle. The model has three key features: (i) the amount of phase shift can be different across regimes (as well as across variables), (ii) it allows the cycle to consist of any number of regimes J is larger than or equal to 2, and (iii) it allows for regime-dependent volatilities and correlations. In an empirical application to monthly returns on size-based stock portfolios, a three-regime model with asymmetric phase shifts and regime-dependent heteroscedasticity is found to characterize the joint distribution of returns most adequately. While large- and small-cap portfolios switch contemporaneously into boom and crash regimes, the large-cap portfolio leads the small-cap portfolio for switches to a moderate regime by a month.

Keywords: imperfect synchronization; phase shifts; regime-switching models; Bayesian analysis (search for similar items in EconPapers)
JEL-codes: C11 C32 C51 C52 (search for similar items in EconPapers)
Date: 2011-01-06
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Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20110002

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