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Incorporating vintage differences and forecasts into Markov switching models

  • Nalewaik, Jeremy J.
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    This paper incorporates vintage differences and forecasts into the Markov switching models described by Hamilton (1994). The vintage differences and forecasts induce parameter breaks close to the end of the sample, too close for standard maximum likelihood techniques to produce precise parameter estimates. A supplementary procedure estimates the statistical properties of the end-of-sample observations that behave differently from the rest, allowing inferred probabilities to reflect the breaks. Empirical results using real-time data show that these techniques improve the ability of a Markov switching model based on GDP and GDI to recognize the start of the 2001 recession.

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    File URL: http://www.sciencedirect.com/science/article/B6V92-5119FKR-1/2/696c540ea42399ea8a0d869346219449
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    Article provided by Elsevier in its journal International Journal of Forecasting.

    Volume (Year): 27 (2011)
    Issue (Month): 2 (April)
    Pages: 281-307

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    Handle: RePEc:eee:intfor:v:27:y::i:2:p:281-307
    Contact details of provider: Web page: http://www.elsevier.com/locate/ijforecast

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    7. Jeremy J. Nalewaik, 2007. "Incorporating vintage differences and forecasts into Markov switching models," Finance and Economics Discussion Series 2007-23, Board of Governors of the Federal Reserve System (U.S.).
    8. Filardo, Andrew J, 1994. "Business-Cycle Phases and Their Transitional Dynamics," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 299-308, July.
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    12. Kim, C-J., 1991. "Dynamic Linear Models with Markov-Switching," Papers 91-8, York (Canada) - Department of Economics.
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