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Some Cautionary Results Concerning Markov-Switching Models with Time-Varying Transition Probabilities

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  • Martín Solá
  • Zacharias Psaradakis
  • Fabio Spagnolo
  • Nicola Spagnolo

Abstract

This paper investigates some finite-sample issues that arise in the analysis of Markovswitching autoregressive models with time-varying probabilities. An extensive simulation study is undertaken to examine the small-sample properties of the maximum likelihood estimator and related statistics, and to investigate the implications of misspecification due to changes in the parameters of the transition mechanism.

Suggested Citation

  • Martín Solá & Zacharias Psaradakis & Fabio Spagnolo & Nicola Spagnolo, 2010. "Some Cautionary Results Concerning Markov-Switching Models with Time-Varying Transition Probabilities," Department of Economics Working Papers 2010-12, Universidad Torcuato Di Tella.
    • Handle: RePEc:udt:wpecon:2010-12
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    References listed on IDEAS

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    6. Francis X. Diebold & Joon-Haeng Lee & Gretchen C. Weinbach, 1993. "Regime switching with time-varying transition probabilities," Working Papers 93-12, Federal Reserve Bank of Philadelphia.
    7. Bekaert, Geert & Harvey, Campbell R, 1995. "Time-Varying World Market Integration," Journal of Finance, American Finance Association, vol. 50(2), pages 403-444, June.
    8. Massimo Guidolin & Allan Timmermann, 2006. "An econometric model of nonlinear dynamics in the joint distribution of stock and bond returns," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(1), pages 1-22, January.
    9. Massimo Guidolin & Allan Timmermann, 2008. "International asset allocation under regime switching, skew, and kurtosis preferences," The Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 889-935, April.
    10. Patricia Alvarez‐Plata & Mechthild Schrooten, 2006. "The Argentinean Currency Crisis: A Markov‐Switching Model Estimation," The Developing Economies, Institute of Developing Economies, vol. 44(1), pages 79-91, March.
    11. Huntley Schaller & Simon Van Norden, 1997. "Regime switching in stock market returns," Applied Financial Economics, Taylor & Francis Journals, vol. 7(2), pages 177-191.
    12. Psaradakis, Zacharias & Sola, Martin, 1998. "Finite-sample properties of the maximum likelihood estimator in autoregressive models with Markov switching," Journal of Econometrics, Elsevier, vol. 86(2), pages 369-386, June.
    13. Filardo, Andrew J, 1994. "Business-Cycle Phases and Their Transitional Dynamics," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 299-308, July.
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    Cited by:

    1. Khayat, Guillaume A., 2018. "The impact of setting negative policy rates on banking flows and exchange rates," Economic Modelling, Elsevier, vol. 68(C), pages 1-10.
    2. Psaradakis, Zacharias & Sola, Martin, 2024. "Markov-Switching Models with State-Dependent Time-Varying Transition Probabilities," Econometrics and Statistics, Elsevier, vol. 29(C), pages 49-63.
    3. repec:dau:papers:123456789/15246 is not listed on IDEAS
    4. Demian Pouzo & Zacharias Psaradakis & Martin Sola, 2022. "Maximum Likelihood Estimation in Markov Regime‐Switching Models With Covariate‐Dependent Transition Probabilities," Econometrica, Econometric Society, vol. 90(4), pages 1681-1710, July.
    5. Demian Pouzo & Zacharias Psaradakis & Martin Sola, 2016. "Maximum Likelihood Estimation in Possibly Misspeci ed Dynamic Models with Time-Inhomogeneous Markov Regimes," Department of Economics Working Papers 2016_04, Universidad Torcuato Di Tella.
    6. Marie Bessec, 2019. "Revisiting the transitional dynamics of business cycle phases with mixed-frequency data," Econometric Reviews, Taylor & Francis Journals, vol. 38(7), pages 711-732, August.
    7. Marie Bessec, 2015. "Revisiting the transitional dynamics of business-cycle phases with mixed frequency data," Post-Print hal-01276824, HAL.

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