TY - JOUR
T1 - Estimation of Markov regime-switching regression models with endogenous switching
AU - Kim, Chang Jin
AU - Piger, Jeremy
AU - Startz, Richard
N1 - Copyright:
Copyright 2008 Elsevier B.V., All rights reserved.
PY - 2008/4
Y1 - 2008/4
N2 - Following Hamilton [1989. A new approach to the economic analysis of nonstationary time series and the business cycle. Econometrica 57, 357-384], estimation of Markov regime-switching regressions typically relies on the assumption that the latent state variable controlling regime change is exogenous. We relax this assumption and develop a parsimonious model of endogenous Markov regime-switching. Inference via maximum likelihood estimation is possible with relatively minor modifications to existing recursive filters. The model nests the exogenous switching model, yielding straightforward tests for endogeneity. In Monte Carlo experiments, maximum likelihood estimates of the endogenous switching model parameters were quite accurate, even in the presence of certain model misspecifications. As an application, we extend the volatility feedback model of equity returns given in Turner et al. [1989. A Markov model of heteroskedasticity, risk, and learning in the stock market. Journal of Financial Economics 25, 3-22] to allow for endogenous switching.
AB - Following Hamilton [1989. A new approach to the economic analysis of nonstationary time series and the business cycle. Econometrica 57, 357-384], estimation of Markov regime-switching regressions typically relies on the assumption that the latent state variable controlling regime change is exogenous. We relax this assumption and develop a parsimonious model of endogenous Markov regime-switching. Inference via maximum likelihood estimation is possible with relatively minor modifications to existing recursive filters. The model nests the exogenous switching model, yielding straightforward tests for endogeneity. In Monte Carlo experiments, maximum likelihood estimates of the endogenous switching model parameters were quite accurate, even in the presence of certain model misspecifications. As an application, we extend the volatility feedback model of equity returns given in Turner et al. [1989. A Markov model of heteroskedasticity, risk, and learning in the stock market. Journal of Financial Economics 25, 3-22] to allow for endogenous switching.
KW - Endogeneity
KW - Regime-switching
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U2 - 10.1016/j.jeconom.2007.10.002
DO - 10.1016/j.jeconom.2007.10.002
M3 - Article
AN - SCOPUS:38949145032
SN - 0304-4076
VL - 143
SP - 263
EP - 273
JO - Journal of Econometrics
JF - Journal of Econometrics
IS - 2
ER -