Accelerating Peak Dating in a Dynamic Factor Markov-Switching Model

Bram van Os and Dick van Dijk
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Bram van Os: Erasmus University Rotterdam

No 20-057/VI, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: The dynamic factor Markov-switching (DFMS) model introduced by Diebold and Rudebusch (1996) has proven to be a powerful framework to measure the business cycle. We extend the DFMS model by allowing for time-varying transition probabilities, with the aim of accelerating the real-time dating of turning points between expansion and recession regimes. Time-variation of the transition probabilities is brought about endogenously using the accelerated score-driven approach and exogenously using the term spread. In a real-time application using the four components of The Conference Board’s Coincident Economic Index for the period 1959-2020, we find that signaling power for recessions is significantly improved and are able to date the 2001 and 2008 recession peaks four and ten months before the NBER.

Keywords: Business cycles; generalized autoregressive score models; time-varying transition probabilities; turning points (search for similar items in EconPapers)
JEL-codes: C32 E32 (search for similar items in EconPapers)
Date: 2020-09-15, Revised 2020-12-14
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-mac and nep-ore
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Journal Article: Accelerating peak dating in a dynamic factor Markov-switching model (2024)
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