Specification Testing of Markov Switching Models*

Robert V. Breunig · Serinah Najarian · Adrian Pagan

49 citations0/0 files storedOxford Bulletin of Economics and Statistics

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Monetary Policy and Economic Impact Financial Risk and Volatility Modeling Statistical Methods and Inference

Abstract

Abstract This paper proposes a set of formal tests to address the goodness‐of‐fit of Markov switching models. These formal tests are constructed as tests of model consistency and of both parametric and non‐parametric encompassing. The formal tests are then combined with informal tests using simulation in combination with non‐parametric density and conditional mean estimation. The informal tests are shown to be useful in shedding light on the failure (or success) of the encompassing tests. Several examples are provided.

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References

1978Specification Tests in Econometrics 1989A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle 1996A test for independence based on the correlation dimension 1990Alternative models for conditional stock volatility 1970Testing for Serial Correlation in Least-Squares Regression When Some of the Regressors are Lagged Dependent Variables 1996Testing Continuous-Time Models of the Spot Interest Rate 1996The econometrics of financial markets 1996Stock market volatility and the business cycle

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