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Long Memory and Regime Switching

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  • Francis X. Diebold
  • Atsushi Inoue

Abstract

The theoretical and empirical econometric literatures on long memory and regime switching have evolved largely independently, as the phenomena appear distinct. We argue, in contrast, that they are intimately related, and we substantiate our claim in several environments, including a simple mixture model, Engle and Lee's (1999) stochastic permanent break model, and Hamilton's (1989) Markov switching model. In particular, we show analytically that stochastic regime switching is easily confused with long memory, even asymptotically, so long as only a small' amount of regime switching occurs, in a sense that we make precise. A Monte Carlo analysis supports the relevance of the theory and produces additional insights.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Technical Working Papers with number 0264.

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Date of creation: Nov 2000
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Publication status: published as Diebold, Francis X. and Atsushi Inoue. "Long Memory And Regime Switching," Journal of Econometrics, 2001, v105(1,Nov), 131-159.
Handle: RePEc:nbr:nberte:0264

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