Quotation Hauzenberger, Niko, Huber, Florian, Pfarrhofer, Michael, Zörner, Thomas. 2020. Stochastic model specification in Markov switching vector error correction models. Studies in Nonlinear Dynamics and Econometrics.


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Abstract

This paper proposes a hierarchical modeling approach to perform stochastic model specification in Markovswitching 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 stochas-tic and suitable shrinkage priors are used. These shrinkage priors enable to assess which coefficients differacross regimes in a flexible manner. In the case of similar coefficients, our model pushes the respective regionsof the parameter space towards the common distribution. This allows for selecting a parsimonious model whilestill maintaining sufficient flexibility to control for sudden shifts in the parameters, if necessary. We apply ourmodeling approach to real-time Euro area data and assume transition probabilities between expansionary andrecessionary regimes to be driven by the cointegration errors. The results suggest that the regime allocationis governed by a subset of short-run adjustment coefficients and regime-specific variance-covariance matri-ces. These findings are complemented by an out-of-sample forecast exercise, illustrating the advantages of themodel for predicting Euro area inflation in real time.

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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Journal article
Journal Studies in Nonlinear Dynamics and Econometrics
Citation Index SSCI
WU-Journal-Rating new VW-D
Language English
Title Stochastic model specification in Markov switching vector error correction models
Year 2020
Reviewed? Y
DOI https://doi.org/10.1515/snde-2018-0069
Open Access N
JEL C11, C32, E31, E32, E44

Associations

Projects
Modeling and forecasting exchange rates in an unified econometric framework
People
Hauzenberger, Niko (Details)
Huber, Florian (Former researcher)
Pfarrhofer, Michael (Former researcher)
Zörner, Thomas (Details)
Organization
Department of Economics (Crespo Cuaresma) (Details)
Research areas (ÖSTAT Classification 'Statistik Austria')
1145 Time series analysis (Details)
5323 Econometrics (Details)
5335 Political economic theory (Details)
5371 Macroeconomics (Details)
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