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The Econometric Analysis of Constructed Binary Time Series

Listed author(s):
  • Don Harding
  • Adrian Pagan

Macroeconometric and Financial researchers often use secondary or constructed binary random variables that differ in terms of their statistical properties from the primary random variables used in microeconometric studies. One important di¤erence between primary and secondary binary variables is that while the former are, in many instances, independently distributed (i.d.) the later are rarely i.d. We show how popular rules for constructing binary states determine the degree and nature of the dependence in those states. When using constructed binary variables as regressands a common mistake is to ignore the dependence by using a probit model. We present an alternative non-parametric method that allows for dependence and apply that method to the issue of using the yield spread to predict recessions.

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File URL: http://www.economics.unimelb.edu.au/downloads/wpapers-06/963.pdf
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Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 963.

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Length: 29 pages
Date of creation: 2006
Handle: RePEc:mlb:wpaper:963
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Department of Economics, The University of Melbourne, 4th Floor, FBE Building, Level 4, 111 Barry Street. Victoria, 3010, Australia

Phone: +61 3 8344 5355
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Web page: http://fbe.unimelb.edu.au/economics
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