D. van Dijk
- Modeling and estimation of synchronization in multistate Markov-switching models
- Number of pages
- Amsterdam/Rotterdam: Tinbergen Institute
- Tinbergen Institute Discussion Paper
- Volume | Edition (Serie)
- Document type
- Working paper
- Faculty of Economics and Business (FEB)
- Amsterdam School of Economics Research Institute (ASE-RI)
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 ≥ 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.
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