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Semi-Markov Regime Switching Regression Models

Author

Listed:
  • Ingo Bulla

    () (Laboratoire de Mathématiques Université de Bretagne Occidentale)

Abstract

Markov switching regression processes belong to the class of Hidden Markov models (HMMs). They provide a higher flexibility than, for example, simple (auto)regression. The main reason for their popularity is the convenient interpretability. For sufficiently long time series, the different regimes can be associated with abrupt macroeconomic events (war, changing governmental policy,etc.). However, it is not always intuitively clear why the regime switching follows a Markov law. Hidden semi-Markov models (HSMMs) are an extension of HMMs. The most appealing property of a HSMM lies in the flexibility of the runlength distributions which are given explicitly instead of implicitly following the geometric distributions of a HMM. We present a generalization of the Markov regime switching framework and introduce the semi-Markov switching (auto)regressive processes. In particular, we focus on the theory for right-censored HSMMs introduced by Guédon in 2003. We present an EM algorithm for auto(regression) models with different state occupancy distributions. Subsequently, we investigate a modified, computational convenient M-step in terms of the One-Step-Late. Finally, the performance of the estimation procedure is analyzed using an economic data set

Suggested Citation

  • Ingo Bulla, 2006. "Semi-Markov Regime Switching Regression Models," Computing in Economics and Finance 2006 438, Society for Computational Economics.
  • Handle: RePEc:sce:scecfa:438
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    More about this item

    Keywords

    Hidden semi-Markov model; One-Step-Late algorithm; regime switching; regression; right-censoring;

    JEL classification:

    • 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
    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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