Conditional Markov regime switching model applied to economic modelling
In this paper we discuss the calibration issues of regime switching models built on mean-reverting and local volatility processes combined with two Markov regime switch- ing processes. In fact, the volatility structure of this model depends on a first exogenous Markov chain whereas the drift structure depends on a conditional Markov chain with re- spect to the first one. The structure is also assumed to be Markovian and both structure and regime are unobserved. Regarding this construction, we extend the classical Expectation- Maximization (EM) algorithm to be applied to our regime switching model. We apply it to economic datas (Euro-Dollars foreign exchange rate and Brent oil price) to show that this modelling well identifies both mean reverting and volatility regimes switches. More- over, it allows us to give economic interpretations of this regime classification such as some financial crisis or some economic policies.
|Date of creation:||31 Oct 2012|
|Date of revision:|
|Note:||View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00747479v2|
|Contact details of provider:|| Web page: https://hal.archives-ouvertes.fr/|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Stéphane Goutte & Benteng Zou, 2012. "Continuous time regime switching model applied to foreign exchange rate," Working Papers hal-00643900, HAL.
- Joanna Janczura & Rafal Weron, 2011.
"Efficient estimation of Markov regime-switching models: An application to electricity spot prices,"
HSC Research Reports
HSC/11/02, Hugo Steinhaus Center, Wroclaw University of Technology.
- Joanna Janczura & Rafał Weron, 2012. "Efficient estimation of Markov regime-switching models: An application to electricity spot prices," AStA Advances in Statistical Analysis, Springer, vol. 96(3), pages 385-407, July.
- Weron, Rafal & Janczura, Joanna, 2010. "Efficient estimation of Markov regime-switching models: An application to electricity wholesale market prices," MPRA Paper 26628, University Library of Munich, Germany.
- Bai, Jushan & Wang, Peng, 2011.
"Conditional Markov chain and its application in economic time series analysis,"
33369, University Library of Munich, Germany.
- Jushan Bai & Peng Wang, 2011. "Conditional Markov chain and its application in economic time series analysis," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(5), pages 715-734, 08.
- Baele, Lieven, 2005.
"Volatility Spillover Effects in European Equity Markets,"
Journal of Financial and Quantitative Analysis,
Cambridge University Press, vol. 40(02), pages 373-401, June.
- L. Baele, 2003. "Volatility Spillover Effects in European Equity Markets," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 03/189, Ghent University, Faculty of Economics and Business Administration.
- Baele, L., 2003. "Volatility Spillover Effects in European Equity Markets," Discussion Paper 2003-114, Tilburg University, Center for Economic Research.
- Engel, Charles & Hamilton, James D, 1990. "Long Swings in the Dollar: Are They in the Data and Do Markets Know It?," American Economic Review, American Economic Association, vol. 80(4), pages 689-713, September.
- Choi Seungmoon, 2009. "Regime-Switching Univariate Diffusion Models of the Short-Term Interest Rate," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 13(1), pages 1-41, March.
- Kim, C-J., 1991.
"Dynamic Linear Models with Markov-Switching,"
91-8, York (Canada) - Department of Economics.
- Ang, Andrew & Bekaert, Geert, 2002.
"Regime Switches in Interest Rates,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 20(2), pages 163-82, April.
- 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.
- Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
When requesting a correction, please mention this item's handle: RePEc:hal:wpaper:hal-00747479. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD)
If references are entirely missing, you can add them using this form.