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Modified Quasi-Likelihood Ratio Test for Regime Switching

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Listed:
  • Hiroyuki Kasahara
  • Tatsuyoshi Okimoto
  • Katsumi Shimotsu

Abstract

type="main"> In this paper we propose a modified quasi-likelihood ratio test of the null hypothesis of one regime against the alternative of two regimes in Markov regime-switching models. The asymptotic distribution of the proposed test statistic is a simple function of Gaussian random variables, and the inference is no more complicated than in the standard case. Our simulations show that the proposed test has good finite sample size and power that are comparable to the quasi-likelihood ratio test of Cho and White. We apply our test to stock returns and Japanese policy functions.

Suggested Citation

  • Hiroyuki Kasahara & Tatsuyoshi Okimoto & Katsumi Shimotsu, 2014. "Modified Quasi-Likelihood Ratio Test for Regime Switching," The Japanese Economic Review, Japanese Economic Association, vol. 65(1), pages 25-41, March.
    • Handle: RePEc:bla:jecrev:v:65:y:2014:i:1:p:25-41
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    File URL: http://hdl.handle.net/10.1111/jere.12027
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    References listed on IDEAS

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    2. Jiang, George J. & Lo, Ingrid, 2014. "Private information flow and price discovery in the U.S. treasury market," Journal of Banking & Finance, Elsevier, vol. 47(C), pages 118-133.
    3. Zhou, Jian, 2016. "A high-frequency analysis of the interactions between REIT return and volatility," Economic Modelling, Elsevier, vol. 56(C), pages 102-108.
    4. Gabriel Rodriguez-Rondon & Jean-Marie Dufour, 2024. "MSTest: An R-Package for Testing Markov Switching Models," Papers 2411.08188, arXiv.org.

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