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Latent Leading and Coincident Factors Model with Markov-Switching Dynamics

  • Konstantin Kholodilin

    ()

    (Institut des recherches économiques et sociales)

This paper introduces a two-factor model of leading and coincident economic indicators. The common leading factor is assumed to Granger-cause the common coincident factor. This property is used to estimate the two common factors simultaneously and hence more efficiently. Two models of the latent leading and coincident factors are studied: a model with linear dynamics and a model with Markov-switching dynamics introduced through the leading factor intercept term. The first model encompasses the comovements between the individual time series. The second model, moreover, takes care of possible asymmetries between the business cycle regimes.

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File URL: http://www.accessecon.com/pubs/EB/2001/Volume3/EB-01C50001A.pdf
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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 3 (2001)
Issue (Month): 7 ()
Pages: 1-13

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Handle: RePEc:ebl:ecbull:eb-01c50001
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  1. Kim, C-J., 1991. "Dynamic Linear Models with Markov-Switching," Papers 91-8, York (Canada) - Department of Economics.
  2. Chauvet, Marcelle & Potter, Simon, 2000. "Coincident and leading indicators of the stock market," Journal of Empirical Finance, Elsevier, vol. 7(1), pages 87-111, May.
  3. Diebold, Francis X & Rudebusch, Glenn D, 1996. "Measuring Business Cycles: A Modern Perspective," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 67-77, February.
  4. James H. Stock & Mark W. Watson, 1988. "A Probability Model of The Coincident Economic Indicators," NBER Working Papers 2772, National Bureau of Economic Research, Inc.
  5. Chang-Jin Kim & Charles R. Nelson, 1999. "State-Space Models with Regime Switching: Classical and Gibbs-Sampling Approaches with Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262112388, June.
  6. Chauvet, Marcelle, 1998. "An Econometric Characterization of Business Cycle Dynamics with Factor Structure and Regime Switching," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 969-96, November.
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