Time Varying Transition Probabilities for Markov Regime Switching Models
Copyright policy )Time Varying Transition Probabilities for Markov Regime Switching Models
We propose a new Markov switching model with time‐varying transitions probabilities. The novelty of our model is that the transition probabilities evolve over time by means of an observation driven model. The innovation of the time‐varying probability is generated by the score of the predictive likelihood function. We show how the model dynamics can be readily interpreted. We investigate the performance of the model in a Monte Carlo study and show that the model is successful in estimating a range of different dynamic patterns for unobserved regime switching probabilities. We also illustrate the new methodology in an empirical setting by studying the dynamic mean and variance behaviour of US industrial production growth.
- VU Research Institutes, Tinbergen Institute Netherlands
- School of Business and Economics, Finance Netherlands
- University of Amsterdam Netherlands
- Vrije Universiteit Amsterdam Netherlands
- Aarhus University Denmark
observation driven models, ddc:330, hidden Markov models, Markov processes: estimation; hidden Markov models, time varying parameter, generalized autoregressive score dynamics, Computational methods in Markov chains, Hidden Markov Models; observation driven models; generalized autoregressive score dynamics, and Infrastructure, Hidden Markov models, Innovation, C32, SDG 9 - Industry, Applications of statistics to economics, C22, Hidden Markov Models, jel: jel:C32, jel: jel:C22
observation driven models, ddc:330, hidden Markov models, Markov processes: estimation; hidden Markov models, time varying parameter, generalized autoregressive score dynamics, Computational methods in Markov chains, Hidden Markov Models; observation driven models; generalized autoregressive score dynamics, and Infrastructure, Hidden Markov models, Innovation, C32, SDG 9 - Industry, Applications of statistics to economics, C22, Hidden Markov Models, jel: jel:C32, jel: jel:C22
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