Regime Switching Models: Real or Spurious Long Memory?

IDHE-MORA Note of Research No. 02-2005

28 Pages Posted: 28 Apr 2006

See all articles by Dominique Guegan

Dominique Guegan

Ecole Normale Superieure de Cachan

Rioublanc Stéphanie

Ecole Normale Superieure de Cachan

Date Written: February 2005

Abstract

In this paper, we analyze the possible confusion in terms of long memory behavior of the autocorrelation function of a Markov switching model. Such a model is known to have a short memory behavior. Analyzing the value of sum of the transition probabilities and the number of switches inside such a model, we show their impact to create long memory. The ability of the true Markov switching model to predict is compared with the forecasts obtained from a long memory process adjusted on data derived from the former model. It is shown that, in certain cases, this spurious long memory behavior can be benefit to get better forecasts.

Keywords: Markov switching models, Structural breaks, Long memory behavior, ARFIMA models, Forecasting.

JEL Classification: C22

Suggested Citation

Guegan, Dominique and Stéphanie, Rioublanc, Regime Switching Models: Real or Spurious Long Memory? (February 2005). IDHE-MORA Note of Research No. 02-2005, Available at SSRN: https://ssrn.com/abstract=898829 or http://dx.doi.org/10.2139/ssrn.898829

Dominique Guegan (Contact Author)

Ecole Normale Superieure de Cachan ( email )

61 avenue du President Wilson
Cachan
France

Rioublanc Stéphanie

Ecole Normale Superieure de Cachan ( email )

61 avenue du President Wilson
Cachan
France
+33 1 42 92 49 95 (Phone)

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