Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/86976
Authors: 
Cakmakli, Cem
Paap, Richard
van Dijk, Dick J.C.
Year of Publication: 
2011
Series/Report no.: 
Tinbergen Institute Discussion Paper 11-002/4
Abstract: 
This paper develops a Markov-Switching vector autoregressive model that allows for imperfect synchronization of cyclical regimes in multiple variables, due to phase shifts of a single common cycle. The model has three key features: (i) the amount of phase shift can be different across regimes (as well as across variables), (ii) it allows the cycle to consist of any number of regimes J is larger than or equal to 2, and (iii) it allows for regime-dependent volatilities and correlations. In an empirical application to monthly returns on size-based stock portfolios, a three-regime model with asymmetric phase shifts and regime-dependent heteroscedasticity is found to characterize the joint distribution of returns most adequately. While large- and small-cap portfolios switch contemporaneously into boom and crash regimes, the large-cap portfolio leads the small-cap portfolio for switches to a moderate regime by a month.
Subjects: 
imperfect synchronization
phase shifts
regime-switching models
Bayesian analysis
JEL: 
C11
C32
C51
C52
Document Type: 
Working Paper

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