Regime Switching Model with Endogenous Autoregressive Latent Factor

Yoosoon Chang (Indiana)
Wednesday, June 11, 2014 - 10:00am
Mohrenstraße 39, Erhard-Schmidt-Hörsaal

This talk introduces a model with regime switching, which is driven by an autoregressive latent factor correlated with the innovation to the observed time series. In our model, the mean or volatility process is switched between two regimes, depending upon whether the underlying autoregressive latent factor takes values above or below some threshold level. If the latent factor becomes exogenous, our model reduces to the conventional markov switching model, and therefore, our model may be regarded as an extended markov switching model allowing for endogeneity in regime switching. Our model is estimated by the maximum likelihood method using a newly developed modified markov switching filter. For both mean and volatility models that are frequently analyzed in markov switching framework, we demonstrate that the presence of endogeneity in regime switching is indeed strong and ubiquitous.