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Regime-Switching Cointegration

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  • Jochmann, Markus
  • Koop, Gary

Abstract

We develop methods for Bayesian inference in vector error correction models which are subject to a variety of switches in regime (e.g. Markov switches in regime or structural breaks). An important aspect of our approach is that we allow both the cointegrating vectors and the number of cointegrating relationships to change when the regime changes. We show how Bayesian model averaging or model selection methods can be used to deal with the high-dimensional model space that results. Our methods are used in an empirical study of the Fisher e ffect.

Suggested Citation

  • Jochmann, Markus & Koop, Gary, 2011. "Regime-Switching Cointegration," SIRE Discussion Papers 2011-60, Scottish Institute for Research in Economics (SIRE).
  • Handle: RePEc:edn:sirdps:348
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    3. Katsuhiro Sugita, 2016. "Bayesian inference in Markov switching vector error correction model," Economics Bulletin, AccessEcon, vol. 36(3), pages 1534-1546.
    4. Miranda-Agrippino, Silvia & Ricco, Giovanni, 2018. "Bayesian Vector Autoregressions," The Warwick Economics Research Paper Series (TWERPS) 1159, University of Warwick, Department of Economics.
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    6. Justyna Wr'oblewska & {L}ukasz Kwiatkowski, 2024. "Identification of structural shocks in Bayesian VEC models with two-state Markov-switching heteroskedasticity," Papers 2406.03053, arXiv.org, revised Jun 2024.
    7. David Knezevic & Martin Nordström & Pär Österholm, 2021. "The relation between municipal and government bond yields in an era of unconventional monetary policy," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 50(1), February.
    8. Jochmann Markus & Koop Gary, 2015. "Regime-switching cointegration," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 19(1), pages 35-48, February.
    9. Joscha Beckmann & Robert Czudaj, 2017. "Effective Exchange Rates, Current Accounts and Global Imbalances," Review of International Economics, Wiley Blackwell, vol. 25(3), pages 500-533, August.
    10. Hauzenberger Niko & Huber Florian & Pfarrhofer Michael & Zörner Thomas O., 2021. "Stochastic model specification in Markov switching vector error correction models," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 25(2), pages 1-17, April.
    11. Hou, Chenghan, 2017. "Infinite hidden markov switching VARs with application to macroeconomic forecast," International Journal of Forecasting, Elsevier, vol. 33(4), pages 1025-1043.
    12. Dark, Jonathan, 2015. "Futures hedging with Markov switching vector error correction FIEGARCH and FIAPARCH," Journal of Banking & Finance, Elsevier, vol. 61(S2), pages 269-285.
    13. Li, Leon, 2022. "The dynamic interrelations of oil-equity implied volatility indexes under low and high volatility-of-volatility risk," Energy Economics, Elsevier, vol. 105(C).
    14. Huber, Florian & Zörner, Thomas O., 2019. "Threshold cointegration in international exchange rates:A Bayesian approach," International Journal of Forecasting, Elsevier, vol. 35(2), pages 458-473.
    15. Tipoy Christian K. & Breitenbach Marthinus C. & Zerihun Mulatu F., 2018. "Exchange rate misalignment and economic growth: evidence from nonlinear panel cointegration and granger causality tests," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 22(2), pages 1-16, April.
    16. Anna Pajor & Justyna Wróblewska & Łukasz Kwiatkowski & Jacek Osiewalski, 2024. "Hybrid SV‐GARCH, t‐GARCH and Markov‐switching covariance structures in VEC models—Which is better from a predictive perspective?," International Statistical Review, International Statistical Institute, vol. 92(1), pages 62-86, April.
    17. Chew Lian Chua & Sarantis Tsiaplias, 2014. "A Bayesian Approach to Modelling Bivariate Time-Varying Cointegration and Cointegrating Rank," Melbourne Institute Working Paper Series wp2014n27, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    18. repec:hal:spmain:info:hdl:2441/27od5pb99881folvtfs8s3k16l is not listed on IDEAS
    19. Joscha Beckmann & Dionysius Glycopantis & Keith Pilbeam, 2018. "The dollar–euro exchange rate and monetary fundamentals," Empirical Economics, Springer, vol. 54(4), pages 1389-1410, June.

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    More about this item

    Keywords

    Bayesian; Markov switching; structural breaks; cointegration; model averaging;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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