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Conditional Markov chain and its application in economic time series analysis

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  • Bai, Jushan
  • Wang, Peng

Abstract

Motivated by the great moderation in major U.S. macroeconomic time series, we formulate the regime switching problem through a conditional Markov chain. We model the long-run volatility change as a recurrent structure change, while short-run changes in the mean growth rate as regime switches. Both structure and regime are unobserved. The structure is assumed to be Markovian. Conditioning on the structure, the regime is also Markovian, whose transition matrix is structure-dependent. This formulation imposes interpretable restrictions on the Hamilton Markov switching model. Empirical studies show that this restricted model well identifies both short-run regime switches and long-run structure changes in the U.S. macroeconomic data.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 33369.

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Date of creation: Aug 2011
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Publication status: Published in Journal of Applied Econometrics 5.26(2011): pp. 715-734
Handle: RePEc:pra:mprapa:33369

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Keywords: Markov regime switching; Conditional Markov chain;

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  1. Emi Nakamura & Jón Steinsson & Robert Barro & José Ursúa, 2010. "Crises and Recoveries in an Empirical Model of Consumption Disasters," NBER Working Papers 15920, National Bureau of Economic Research, Inc.
  2. John Geweke & Gianni Amisano, 2011. "Hierarchical Markov normal mixture models with applications to financial asset returns," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(1), pages 1-29, January/F.
  3. Chang-Jin Kim & Charles Nelson & Jeremy M. Piger, 2003. "The less volatile U.S. economy: a Bayesian investigation of timing, breadth, and potential explanations," Working Papers 2001-016, Federal Reserve Bank of St. Louis.
  4. Christopher A. Sims & Daniel F. Waggoner & Tao Zha, 2006. "Methods for inference in large multiple-equation Markov-switching models," Working Paper 2006-22, Federal Reserve Bank of Atlanta.
  5. Margaret M. McConnell & Gabriel Perez Quiros, 1997. "Output fluctuations in the United States: what has changed since the early 1980s?," Research Paper 9735, Federal Reserve Bank of New York.
  6. Charles R. Nelson, 2000. "Output fluctuations in the United States: what has changed since the early 1980s? comments," Proceedings, Federal Reserve Bank of San Francisco.
  7. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
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Cited by:
  1. Stéphane GOUTTE & Benteng Zou, 2011. "Foreign exchange rates under Markov Regime switching model," CREA Discussion Paper Series 11-16, Center for Research in Economic Analysis, University of Luxembourg.
  2. Stéphane Goutte & Benteng Zou, 2012. "Continuous time regime switching model applied to foreign exchange rate," Working Papers hal-00643900, HAL.
  3. Stéphane Goutte, 2012. "Conditional Markov regime switching model applied to economic modelling," Working Papers hal-00747479, HAL.
  4. Troy Davig, 2008. "Detecting recessions in the Great Moderation: a real-time analysis," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 5-33.
  5. Shu-Ping Shi, 2013. "Specification sensitivities in the Markov-switching unit root test for bubbles," Empirical Economics, Springer, vol. 45(2), pages 697-713, October.

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