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Testing for the omission of relevant variables and regime-switching misspecification

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  • Andrea Beccarini

    (University of Muenster)

Abstract

This article shows that the interpretation of statistical evidence of regime-switching is not unambiguous. The usual interpretation is that some parameters switch according to the values of a predefined latent variable. An alternative interpretation is that regime-switching, as a statistical evidence, is also possible when the linear model is underspecified and the omitted variable bias emerges. A formal test is proposed to verify a potentially spurious regression with regime-switching. Through this test, it is evident that regime-switching estimates presented in an academic paper, should be interpreted as a consequence of the misspecification considered here.

Suggested Citation

  • Andrea Beccarini, 2019. "Testing for the omission of relevant variables and regime-switching misspecification," Empirical Economics, Springer, vol. 56(3), pages 775-796, March.
    • Handle: RePEc:spr:empeco:v:56:y:2019:i:3:d:10.1007_s00181-017-1373-8
    DOI: 10.1007/s00181-017-1373-8
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    References listed on IDEAS

    as
    1. Andrea Beccarini, 2010. "Eliminating the omitted variable bias by a regime-switching approach," Journal of Applied Statistics, Taylor & Francis Journals, vol. 37(1), pages 57-75.
    2. Timmermann, Allan, 2000. "Moments of Markov switching models," Journal of Econometrics, Elsevier, vol. 96(1), pages 75-111, May.
    3. Kim, Chang-Jin & Piger, Jeremy & Startz, Richard, 2008. "Estimation of Markov regime-switching regression models with endogenous switching," Journal of Econometrics, Elsevier, vol. 143(2), pages 263-273, April.
    4. Shiu-Sheng Chen, 2007. "Does Monetary Policy Have Asymmetric Effects on Stock Returns?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 667-688, March.
    5. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
    6. Morley James & Piger Jeremy & Tien Pao-Lin, 2013. "Reproducing business cycle features: are nonlinear dynamics a proxy for multivariate information?," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 17(5), pages 483-498, December.
    7. Marine Carrasco & Liang Hu & Werner Ploberger, 2014. "Optimal Test for Markov Switching Parameters," Econometrica, Econometric Society, vol. 82(2), pages 765-784, March.
    8. Silvestro Di Sanzo, 2009. "Testing for linearity in Markov switching models: a bootstrap approach," Statistical Methods & Applications, Springer;Società Italiana di Statistica, vol. 18(2), pages 153-168, July.
    9. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Regime-switching estimator; Omitted variable bias; Quadratic form; Misspecification;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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