Time‐Varying Transition Probabilities for Markov Regime Switching Models. (29th September 2016)

• Record Type: Journal Article
• Authors: Bazzi, Marco; Blasques, Francisco; Koopman, Siem Jan; Lucas, Andre
• Is Part Of: Journal of time series analysis. Volume 38:Number 3(2017:May)
• Page Start: 458
• Page End: 478
• Publication Date: 2016-09-29
• Subjects: Hidden Markov models -- observation driven models -- time varying parameter; Time-series analysis -- Periodicals; 519.232
• DOI: 10.1111/jtsa.12211
• Languages: English
• ISSNs: 0143-9782

Abstract

Abstract : 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.