Bai, Jushan and Wang, Peng (2011): Conditional Markov chain and its application in economic time series analysis. Published in: Journal of Applied Econometrics , Vol. 26, No. 5 (August 2011): pp. 715-734.
Download (266kB) | Preview
Motivated by the great moderation in major U.S. macroeconomic time series, we formulate the regime switching problem through a conditional Markov chain. We model the long-run volatility change as a recurrent structure change, while short-run changes in the mean growth rate as regime switches. Both structure and regime are unobserved. The structure is assumed to be Markovian. Conditioning on the structure, the regime is also Markovian, whose transition matrix is structure-dependent. This formulation imposes interpretable restrictions on the Hamilton Markov switching model. Empirical studies show that this restricted model well identifies both short-run regime switches and long-run structure changes in the U.S. macroeconomic data.
|Item Type:||MPRA Paper|
|Original Title:||Conditional Markov chain and its application in economic time series analysis|
|Keywords:||Markov regime switching; Conditional Markov chain|
|Subjects:||C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models; Multiple Variables > C32 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
C - Mathematical and Quantitative Methods > C2 - Single Equation Models; Single Variables > C22 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
C - Mathematical and Quantitative Methods > C0 - General > C01 - Econometrics
|Depositing User:||Peng Wang|
|Date Deposited:||14. Sep 2011 11:23|
|Last Modified:||11. Feb 2013 20:01|
Barro R, Nakamura E, Steinsson J, Ursua J. 2009. Crises and recoveries in an empirical model of consumption disasters. Working paper.
Blanchard O, Simon J. 2001. The long and large decline in U.S. output volatility. Brookings Papers on Economic Activity, 1: 135-64.
Dempster A, Laird N, Rubin D. 1977. Maximum likelihood from incomplete data via the EM algorithm. Journal of the Royal Statistical Society, Series B, 39(1):1-38.
Diebold FX, Lee H, Weinbach G. 1994. Regime switching with time-varying transition probabilities. C. Hargreaves (ed.), Nonstationary Time Series Analysis and Cointegration. (Advanced Texts in Econometrics, C.W.J. Granger and G. Mizon, eds.), 283-302, Oxford: Oxford University Press.
Geweke J, Amisano G. 2007. Hierarchical Markov Normal mixture models with applications to �financial asset returns. Working paper.
Hamilton J. 1989. A new approach to the economic analysis of nonstationary time series and the business cycle,Econometrica, 57: 357-384.
Hamilton J. 1994. Time Series Analysis. Princeton: Princeton University Press.
Hamilton J, Lin G. 1998. Stock market volatility and the business cycle. Journal of Applied Econometrics, 11-5: 573-593.
Kim CJ, Nelson C. 1999. State Space Models With Regime Switching: Classical and Gibbs Sampling Approaches With Applications. Massachusetts: MIT Press.
Kim CJ, Nelson C. 1999. Has the U.S. economy become more stable? a Bayesian approach based on a Markov-switching model of the business cycle. Review of Economics and Statistics, 81: 608-616.
Kim CJ, Nelson C, Piger JM. 2004. The less volatile U.S. economy: a Bayesian investigation of timing, breadth, and potential explanations. Journal of Business and Economic Statistics, 22: 80-93.
Lettau M, Ludvigson S, Wachter JA. 2008. The declining equity premium: what role does macroeconomic risk play? The Review of Financial Studies 21(4): 1653-1687.
McLachlan GJ, Krishnan T. 1996. The EM Algorithm and Extensions, Wiley-Interscience.
McConnell M, Perez-Quiros G. 2000. Output fluctuations in the United States: what has changed since the early 1980s? American Economic Review, 90: 1464-76.
Meng XL, Rubin DB. 1993. Maximum likelihood estimation via the ECM algorithm: a general framework. Biometrika 80 (2): 267-278.
Sims CA, Waggoner DF, Zha T. 2008. Methods for inference in large multiple-equation Markov-switching models. Journal of Econometrics 146:255-274.
Warnock MVC,Warnock FE. 2000. The declining volatility of U.S. employment: was Arthur Burns right? Working paper.