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Long Memory and Regime Switching

  • Francis X. Diebold
  • Atsushi Inoue

The theoretical and empirical econometric literatures on long memory and regime switching have evolved largely independently, as the phenomena appear distinct. We argue, in contrast, that they are intimately related, and we substantiate our claim in several environments, including a simple mixture model, Engle and Lee's (1999) stochastic permanent break model, and Hamilton's (1989) Markov switching model. In particular, we show analytically that stochastic regime switching is easily confused with long memory, even asymptotically, so long as only a small' amount of regime switching occurs, in a sense that we make precise. A Monte Carlo analysis supports the relevance of the theory and produces additional insights.

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File URL: http://www.nber.org/papers/t0264.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Technical Working Papers with number 0264.

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Date of creation: Nov 2000
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Publication status: published as Diebold, Francis X. and Atsushi Inoue. "Long Memory And Regime Switching," Journal of Econometrics, 2001, v105(1,Nov), 131-159.
Handle: RePEc:nbr:nberte:0264
Note: TWP
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  5. Diebold, Francis X & Rudebusch, Glenn D, 1996. "Measuring Business Cycles: A Modern Perspective," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 67-77, February.
  6. Cioczek-Georges, R. & Mandelbrot, B. B., 1995. "A class of micropulses and antipersistent fractional Brownian motion," Stochastic Processes and their Applications, Elsevier, vol. 60(1), pages 1-18, November.
  7. Xiaohong Chen & Lars P. Hansen & Marine Carrasco, 2008. "Nonlinearity and Temporal Dependence," Cowles Foundation Discussion Papers 1652, Cowles Foundation for Research in Economics, Yale University.
  8. Balke, Nathan S. & Fomby, Thomas B., 1991. "Shifting trends, segmented trends, and infrequent permanent shocks," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 61-85, August.
  9. Baillie, Richard T., 1996. "Long memory processes and fractional integration in econometrics," Journal of Econometrics, Elsevier, vol. 73(1), pages 5-59, July.
  10. Rydén, Tobias & Teräsvirta, Timo & Åsbrink, Stefan, 1996. "Stylized Facts of Daily Return Series and the Hidden Markov Model," SSE/EFI Working Paper Series in Economics and Finance 117, Stockholm School of Economics.
  11. Francis X. Diebold & Glenn D. Rudebusch, 1988. "Long memory and persistence in aggregate output," Finance and Economics Discussion Series 7, Board of Governors of the Federal Reserve System (U.S.).
  12. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers 338, Princeton, Department of Economics - Econometric Research Program.
  13. Balke, Nathan S & Fomby, Thomas B, 1997. "Threshold Cointegration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(3), pages 627-45, August.
  14. Ding, Zhuanxin & Granger, Clive W. J. & Engle, Robert F., 1993. "A long memory property of stock market returns and a new model," Journal of Empirical Finance, Elsevier, vol. 1(1), pages 83-106, June.
  15. Andersen T. G & Bollerslev T. & Diebold F. X & Labys P., 2001. "The Distribution of Realized Exchange Rate Volatility," Journal of the American Statistical Association, American Statistical Association, vol. 96, pages 42-55, March.
  16. Robert F. Engle & Aaron D. Smith, 1999. "Stochastic Permanent Breaks," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 553-574, November.
  17. Granger, Clive W.J. & Hyung, Namwon, 1999. "Occasional Structural Breaks and Long Memory," University of California at San Diego, Economics Working Paper Series qt4d60t4jh, Department of Economics, UC San Diego.
  18. Chambers, Marcus J, 1998. "Long Memory and Aggregation in Macroeconomic Time Series," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 1053-72, November.
  19. Granger, Clive W. J. & Terasvirta, Timo, 1999. "A simple nonlinear time series model with misleading linear properties," Economics Letters, Elsevier, vol. 62(2), pages 161-165, February.
  20. Timmermann, Allan, 2000. "Moments of Markov switching models," Journal of Econometrics, Elsevier, vol. 96(1), pages 75-111, May.
  21. Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Ebens, Heiko, 2001. "The distribution of realized stock return volatility," Journal of Financial Economics, Elsevier, vol. 61(1), pages 43-76, July.
  22. I.N. Lobato & N.E. Savin, 1996. "Real and Spurious Long Memory Properties of Stock Market Data," Econometrics 9605004, EconWPA, revised 26 Sep 1996.
  23. 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.
  24. William R. Parke, 1999. "What Is Fractional Integration?," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 632-638, November.
  25. Michael P. Clements & Hans-Martin Krolzig, 1998. "A comparison of the forecast performance of Markov-switching and threshold autoregressive models of US GNP," Econometrics Journal, Royal Economic Society, vol. 1(Conferenc), pages C47-C75.
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