Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/259880 
Authors: 
Year of Publication: 
2004
Series/Report no.: 
Working Paper No. 2004:4
Publisher: 
Lund University, School of Economics and Management, Department of Economics, Lund
Abstract: 
This paper seeks to investigate and remedy the apparent inability of Markov regime switching models to predict future states in the medium to long term. We show that projected time varying transition probability series in the model may be biased towards predicting regime switches with high probability in the short run, and as a consequence it is hard or impossible to obtain longer run inference. We propose a penalized maximum likelihood estimator where non-smoothness in the transition series has negative influence on the likelihood function, which is shown to remedy the short run bias. In an empirical investigation of U.S. real GDP, the penalized model works better in terms of forecasting future recessions as defined by the NBER business cycle dating.
Subjects: 
regime switching
transition probability
forecasting
JEL: 
C13
C32
E32
Document Type: 
Working Paper

Files in This Item:
File
Size
371.07 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.