Modeling and Estimation of Synchronization in Multistate Markov-Switching Models

43 Pages Posted: 9 Jan 2011 Last revised: 16 Jan 2011

See all articles by Cem Cakmakli

Cem Cakmakli

Erasmus University Rotterdam (EUR) - Department of Econometrics

Richard Paap

Erasmus University Rotterdam (EUR) - Department of Econometrics; Tinbergen Institute; Erasmus Research Institute of Management (ERIM)

Dick J. C. van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute; ERIM

Date Written: January 6, 2011

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 is larger then 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.

Keywords: imperfect synchronization, phase shifts, regime-switching models, Bayesian analysis

JEL Classification: C11, C32, C51, C52

Suggested Citation

Cakmakli, Cem and Paap, Richard and van Dijk, Dick J.C., Modeling and Estimation of Synchronization in Multistate Markov-Switching Models (January 6, 2011). Available at SSRN: https://ssrn.com/abstract=1735836 or http://dx.doi.org/10.2139/ssrn.1735836

Cem Cakmakli (Contact Author)

Erasmus University Rotterdam (EUR) - Department of Econometrics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Richard Paap

Erasmus University Rotterdam (EUR) - Department of Econometrics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Tinbergen Institute ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Dick J.C. Van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute

P.O. Box 1738
3000 DR Rotterdam
Netherlands

ERIM ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1263 (Phone)
+31 10 4089162 (Fax)

HOME PAGE: http://people.few.eur.nl/djvandijk

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