Time Varying Transition Probabilities for Markov Regime Switching Models

Marco Bazzi, Francisco Blasques (), Siem Jan Koopman and Andre Lucas
Additional contact information
Marco Bazzi: University of Padova, Italy

No 14-072/III, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We propose a new Markov switching model with time varying probabilities for the transitions. The novelty of our model is that the transition probabilities evolve over time by means of an observation driven model. The innovation of the time varying probability is generated by the score of the predictive likelihood function. We show how the model dynamics can be readily interpreted. We investigate the performance of the model in a Monte Carlo study and show that the model is successful in estimating a range of different dynamic patterns for unobserved regime switching probabilities. We also illustrate the new methodology in an empirical setting by studying the dynamic mean and variance behavior of U.S. Industrial Production growth. We find empirical evidence of changes in the regime switching probabilities, with more persistence for high volatility regimes in the earlier part of the sample, and more persistence for low volatility regimes in the later part of the sample.

Keywords: Hidden Markov Models; observation driven models; generalized autoregressive score dynamics (search for similar items in EconPapers)
JEL-codes: C22 C32 (search for similar items in EconPapers)
Date: 2014-06-17
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Downloads: (external link)
https://papers.tinbergen.nl/14072.pdf (application/pdf)

Related works:
Journal Article: Time-Varying Transition Probabilities for Markov Regime Switching Models (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:tin:wpaper:20140072

Access Statistics for this paper

More papers in Tinbergen Institute Discussion Papers from Tinbergen Institute Contact information at EDIRC.
Bibliographic data for series maintained by Tinbergen Office +31 (0)10-4088900 ().