✦ LIBER ✦

Conditional Markov chain and its application in economic time series analysis

✍ Scribed by Jushan Bai; Peng Wang

Publisher: John Wiley and Sons
Year: 2010
Tongue: English
Weight: 725 KB
Volume: 26
Category: Article
ISSN: 0883-7252
DOI: 10.1002/jae.1140

No coin nor oath required. For personal study only.

✦ Synopsis

Motivated by the great moderation in major US 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 US macroeconomic data.

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