Multiple Chains Markov Switching Vector Autoregression

Research output: Working paper/Preprint Working paperResearch

Abstract

We present a new modelling framework for the bivariate hidden Markov model. The proposed specification is composed by five latent Markovian chains which drive the evolution of the parameters of a bivariate Gaussian distribution. The maximum likelihood estimator is computed via an expectation conditional maximization algorithm with closed form conditional maximization steps, specifically developed for our model. Identification of model parameters, as well as consistency and asymptotic Normality of the maximum likelihood estimator are discussed. Finite sample properties of the estimator are investigated in an extensive simulation study. An empirical application with the bivariate series of US stocks and bond returns illustrates the benefits of the new specification with respect to the standard hidden Markov model.
Original languageEnglish
Publication statusSubmitted - 2020

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