Omitted Variables Bias in Regime-Switching Models with Slope-Constrained Estimators: Evidence from Monte Carlo Simulations

Journal of Statistical and Econometric Methods 2, No. 3 (September 2013): 49-55

7 Pages Posted: 15 Nov 2014

See all articles by Ermanno Affuso

Ermanno Affuso

University of South Alabama - Mitchell College of Business - Department of Economics and Finance

Steven B. Caudill

Auburn University - Department of Economics

Franklin G. Mixon Jr

Columbus State University

Date Written: 2013

Abstract

In a recent study, Beccarini showed that one can eliminate or reduce the bias in OLS regression estimators caused by an omitted polychotomous variable by estimating a regime-switching model. If the missing polychotomous variable assumes K values, then elimination or reduction of the bias requires the estimation of a K-component mixture model. In his Monte Carlo simulations, however, the slope of the parameter of interest is estimated once for each of the K components. After discussing problems associated with multiple estimates of the parameter of interest, this paper extends Beccarini’s Monte Carlo analysis to include the slope-constrained estimator obtained by using the EM algorithm of Bartolucci and Scaccia. We find a small gain in efficiency with the slope-constrained estimator and that the weighted-average estimator in Beccarini produces a large number of rejections of the true null hypothesis of a single slope when the components are not widely separated.

Keywords: omitted variables bias, regime-switching models, slope-constrained estimators, Monte Carlo simulations

JEL Classification: C15, C40

Suggested Citation

Affuso, Ermanno and Caudill, Steven B. and Mixon Jr, Franklin G., Omitted Variables Bias in Regime-Switching Models with Slope-Constrained Estimators: Evidence from Monte Carlo Simulations (2013). Journal of Statistical and Econometric Methods 2, No. 3 (September 2013): 49-55, Available at SSRN: https://ssrn.com/abstract=2524039

Ermanno Affuso (Contact Author)

University of South Alabama - Mitchell College of Business - Department of Economics and Finance ( email )

College of Business and Management Studies
Mobile, AL 36688
United States
(251) 460-7908 (Phone)
(251) 460-6734 (Fax)

Steven B. Caudill

Auburn University - Department of Economics ( email )

415 W. Magnolia
Auburn, AL 36849-5242
United States
334-844-2907 (Phone)

Franklin G. Mixon Jr

Columbus State University

Columbus, GA 31907-5645
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
15
Abstract Views
262
PlumX Metrics