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The Econometric Analysis of Constructed Binary Time Series

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Author Info
Don Harding
Adrian Pagan

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Abstract

Macroeconometric and Financial researchers often use secondary or constructed binary random variables that differ in terms of their statistical properties from the primary random variables used in microeconometric studies. One important di¤erence between primary and secondary binary variables is that while the former are, in many instances, independently distributed (i.d.) the later are rarely i.d. We show how popular rules for constructing binary states determine the degree and nature of the dependence in those states. When using constructed binary variables as regressands a common mistake is to ignore the dependence by using a probit model. We present an alternative non-parametric method that allows for dependence and apply that method to the issue of using the yield spread to predict recessions.

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File URL: http://www.economics.unimelb.edu.au/SITE/research/workingpapers/wp06/963.pdf
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Publisher Info
Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 963.

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Length: 29 pages
Date of creation: 2006
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Handle: RePEc:mlb:wpaper:963

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Related research
Keywords: Business cycle binary variable Markov chain probit model yield curve

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Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Michael D. Bordo & Michael J. Dueker & David C. Wheelock, 2008. "Inflation, monetary policy and stock market conditions," Working Papers 2008-012, Federal Reserve Bank of St. Louis. [Downloadable!]
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