Quotation Huber, Florian, Pfarrhofer, Michael, Zörner, Thomas. 2018. Stochastic model specification in Markov switching vector error correction models.


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Abstract

This paper proposes a hierarchical modeling approach to perform stochastic model specification in Markov switching vector error correction models. We assume that a common distribution gives rise to the regime-specific regression coefficients. The mean as well as the variances of this distribution are treated as fully stochastic and suitable shrinkage priors are used. These shrinkage priors enable to assess which coefficients differ across regimes in a flexible manner. In the case of similar coefficients, our model pushes the respective regions of the parameter space towards the common distribution. This allows for selecting a parsimonious model while still maintaining sufficient flexibility to control for sudden shifts in the parameters, if necessary. In the empirical application, we apply our modeling approach to Euro area data and assume that transition probabilities between expansion and recession regimes are driven by the cointegration errors. Our findings suggest that lagged cointegration errors have predictive power for regime shifts and these movements between business cycle stages are mostly driven by differences in error variances.

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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Working/discussion paper, preprint
Language English
Title Stochastic model specification in Markov switching vector error correction models
Year 2018
URL https://arxiv.org/abs/1807.00529
JEL C32, C11, E32, E44, E51

Associations

Projects
Modeling and forecasting exchange rates in an unified econometric framework
People
Huber, Florian (Former researcher)
Pfarrhofer, Michael (Former researcher)
Zörner, Thomas (Details)
Organization
Institute for Macroeconomics IN (Details)
Research areas (ÖSTAT Classification 'Statistik Austria')
5323 Econometrics (Details)
5371 Macroeconomics (Details)
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