Testing Markov switching models
Abstract:In this article, we propose a new test for Markov switching models. Unlike the tests in the existing literature (e.g. Hansen, 1992; Garcia, 1998; Cho and White, 2007), we focus on testing the null of two regimes, instead of one single regime, in a switching framework. To implement our test, we propose a Markov switching model with absorbing states and examine whether the absorption probabilities are close to the boundary of the parameter space. We exploit recent advances by Andrews (2001) and conduct inference in the proposed model.
Document Type: Research Article
Affiliations: Department of Quantitative Finance, National Tsing-Hua University, Hsinchu, 30013, Taiwan
Publication date: June 13, 2014