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Testing Markov switching models

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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.

Keywords: C22; C51; Markov switching model; absorbing state; boundary

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036846.2014.892201

Affiliations: Department of Quantitative Finance, National Tsing-Hua University, Hsinchu, 30013, Taiwan

Publication date: June 13, 2014

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