Transition Variables in the Markov-switching Model: Some Small Sample Properties
AbstractThis paper researches small-sample properties of the Markov-switching model with time-varying transition probabilities. By means of simulation, it is shown that the likelihood ratio statistic is over-sized for sample sizes relevant in many empirical applications. The number of regime switches occurring in the sample rather than the total number of observations is central to the magnitude of the distortion, with other factors such a persistence in transition equation variables and the precision at which states are inferred being influential on size. In an application to possible predictors of switches to recessions in U.S. data, it is shown that critical values for the likelihood ratio statistic need to be adjusted far upwards to reflect true confidence levels.
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Bibliographic InfoPaper provided by Lund University, Department of Economics in its series Working Papers with number 2005:25.
Length: 16 pages
Date of creation: 21 Mar 2005
Date of revision:
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More information through EDIRC
regime switching; transition probability; small-sample;
Find related papers by JEL classification:
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-04-03 (All new papers)
- NEP-ECM-2005-04-03 (Econometrics)
- NEP-ETS-2005-04-03 (Econometric Time Series)
- NEP-MAC-2005-04-03 (Macroeconomics)
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