Modeling and Estimation of Synchronization in Multistate Markov-Switching Models
43 Pages Posted: 9 Jan 2011 Last revised: 16 Jan 2011
Date Written: January 6, 2011
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
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