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Incorporating vintage differences and forecasts into Markov switching models

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  • Nalewaik, Jeremy J.
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    Abstract

    This paper incorporates vintage differences and forecasts into the Markov switching models described by Hamilton (1994). The vintage differences and forecasts induce parameter breaks close to the end of the sample, too close for standard maximum likelihood techniques to produce precise parameter estimates. A supplementary procedure estimates the statistical properties of the end-of-sample observations that behave differently from the rest, allowing inferred probabilities to reflect the breaks. Empirical results using real-time data show that these techniques improve the ability of a Markov switching model based on GDP and GDI to recognize the start of the 2001 recession.

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    Bibliographic Info

    Article provided by Elsevier in its journal International Journal of Forecasting.

    Volume (Year): 27 (2011)
    Issue (Month): 2 (April)
    Pages: 281-307

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    Handle: RePEc:eee:intfor:v:27:y::i:2:p:281-307

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    Web page: http://www.elsevier.com/locate/ijforecast

    Related research

    Keywords: Business cycles Recession probabilities Markov switching models Real-time data analysis;

    References

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    1. Michael J. Dueker, 2003. "Dynamic forecasts of qualitative variables: a Qual VAR model of U.S. recessions," Working Papers 2001-012, Federal Reserve Bank of St. Louis.
    2. Andrew J. Filardo & Stephen F. Gordon, 1993. "Business cycle durations," Research Working Paper 93-11, Federal Reserve Bank of Kansas City.
    3. Jon Faust & John H. Rogers & Jonathan H. Wright, 2000. "News and noise in G-7 GDP announcements," International Finance Discussion Papers 690, Board of Governors of the Federal Reserve System (U.S.).
    4. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
    5. N. Kundan Kishor & Evan F. Koenig, 2009. "VAR Estimation and Forecasting When Data Are Subject to Revision," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 30(2), pages 181-190, July.
    6. Murphy, Kevin M & Topel, Robert H, 1985. "Estimation and Inference in Two-Step Econometric Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(4), pages 370-79, October.
    7. Heikki Kauppi & Pentti Saikkonen, 2008. "Predicting U.S. Recessions with Dynamic Binary Response Models," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 777-791, November.
    8. N. Gregory Mankiw & Matthew D. Shapiro, 1986. "News or Noise? An Analysis of GNP Revisions," NBER Working Papers 1939, National Bureau of Economic Research, Inc.
    9. Dennis J. Fixler & Jeremy J. Nalewaik, 2007. "News, noise, and estimates of the "true" unobserved state of the economy," Finance and Economics Discussion Series 2007-34, Board of Governors of the Federal Reserve System (U.S.).
    10. Kim, Chang-Jin, 1994. "Dynamic linear models with Markov-switching," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 1-22.
    11. Hamilton, James D & Perez-Quiros, Gabriel, 1996. "What Do the Leading Indicators Lead?," The Journal of Business, University of Chicago Press, vol. 69(1), pages 27-49, January.
    12. Filardo, Andrew J, 1994. "Business-Cycle Phases and Their Transitional Dynamics," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 299-308, July.
    13. Jeremy J. Nalewaik, 2007. "Incorporating vintage differences and forecasts into Markov switching models," Finance and Economics Discussion Series 2007-23, Board of Governors of the Federal Reserve System (U.S.).
    14. Karen E. Dynan & Douglas Elmendorf, 2001. "Do provisional estimates of output miss economic turning points?," Finance and Economics Discussion Series 2001-52, Board of Governors of the Federal Reserve System (U.S.).
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