Regime Switching Models: Real or Spurious Long Memory?
IDHE-MORA Note of Research No. 02-2005
28 Pages Posted: 28 Apr 2006
Date Written: February 2005
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: Suggested Citation
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