The Econometric Analysis of Constructed Binary Time Series. Working paper #1
AbstractMacroeconometric 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 difference 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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Bibliographic InfoPaper provided by National Centre for Econometric Research in its series NCER Working Paper Series with number 1.
Date of creation: 15 Apr 2006
Date of revision:
Business cycle; binary variable; Markov chain; probit model; yield curve;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-01-28 (All new papers)
- NEP-ECM-2007-01-28 (Econometrics)
- NEP-ETS-2007-01-28 (Econometric Time Series)
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