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Real-time Markov Switching and Leading Indicators in Times of the Financial Crisis

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  • Thomas Theobald

Abstract

This paper uses several macroeconomic and financial indicators within a Markov Switching (MS) framework to predict the turning points of the business cycle. The presented model is applied to monthly German real-time data covering the recession and the recovery after the financial crisis. We show how to take advantage of combining single MS forecasts and of changing the number of regimes on the real-time path, where both leads to a higher forecast accuracy. Changing the number of regimes implies a distinction for recessions representing either a normal or an extraordinary one, which particularly means to determine as early as possible the point in time, from which the last recession structurally exceeded the previous ones. In fact it turns out that the Markov Switching model can signal quite early whether a conventional recession happens or whether an economic downturn will be more substantial.

Suggested Citation

  • Thomas Theobald, 2012. "Real-time Markov Switching and Leading Indicators in Times of the Financial Crisis," IMK Working Paper 98-2012, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  • Handle: RePEc:imk:wpaper:98-2012
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Çakmaklı, Cem & Paap, Richard & van Dijk, Dick, 2013. "Measuring and predicting heterogeneous recessions," Journal of Economic Dynamics and Control, Elsevier, vol. 37(11), pages 2195-2216.
    2. Schreiber, Sven & Soldatenkova, Natalia, 2016. "Anticipating business-cycle turning points in real time using density forecasts from a VAR," Journal of Macroeconomics, Elsevier, vol. 47(PB), pages 166-187.

    More about this item

    Keywords

    Business Cycle; Leading Indicators; Macroeconomic Forecasting; Markov Switching;

    JEL classification:

    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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