Testing Markov switching models |
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Authors: | Yu-Lieh Huang |
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Institution: | 1. Department of Quantitative Finance, National Tsing-Hua University, Hsinchu 30013, Taiwanylihuang@mx.nthu.edu.tw |
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Abstract: | In this article, we propose a new test for Markov switching models. Unlike the tests in the existing literature (e.g. Hansen, 1992; Garcia, 1998; Cho and White, 2007), we focus on testing the null of two regimes, instead of one single regime, in a switching framework. To implement our test, we propose a Markov switching model with absorbing states and examine whether the absorption probabilities are close to the boundary of the parameter space. We exploit recent advances by Andrews (2001) and conduct inference in the proposed model. |
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Keywords: | absorbing state boundary Markov switching model |
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