Comparing Probability Forecasts in Markov Regime Switching Business Cycle Models:
We evaluate techniques for comparing the ability of Markov regime switching (MRS) models to fit underlying regimes of a series of interest. This is particularly important in the business cycle literature where one may be interested in determining whether using leading indicators to allow transition...
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| Format: | Elektronisch Artikel |
| Sprache: | English |
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Paris
OECD Publishing
2007
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| Zusammenfassung: | We evaluate techniques for comparing the ability of Markov regime switching (MRS) models to fit underlying regimes of a series of interest. This is particularly important in the business cycle literature where one may be interested in determining whether using leading indicators to allow transition probabilities to vary improves the ability of MRS models to fit the NBER business cycle chronology. This is typically done using the quadratic probability score, or QPS (Diebold and Rudebusch, 1989). Although it is possible to statistically compare the QPS statistics for two MRS models using the Diebold and Mariano (1995) (DM) test statistic for comparing forecasts, we find using a Monte Carlo experiment that the DM statistic tends to under-reject (the null of "no difference in forecast accuracy") when comparing MRS models. This we believe is because of the strong non-normality of the forecast errors of such models. Furthermore, using simulation-based inference we demonstrate that leading indicators improve the fit of an MRS model of the US business cycle chronology by 24 percent, such improvement having a p-value of 0.001. |
| Beschreibung: | 1 Online-Ressource (20 p.) 16 x 23cm. |
| DOI: | 10.1787/jbcma-v2007-art4-en |
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| spelling | Smith, Daniel R... VerfasserIn aut Comparing Probability Forecasts in Markov Regime Switching Business Cycle Models Daniel R., Smith and Allan, Layton Paris OECD Publishing 2007 1 Online-Ressource (20 p.) 16 x 23cm. Text txt rdacontent Computermedien c rdamedia Online-Ressource cr rdacarrier We evaluate techniques for comparing the ability of Markov regime switching (MRS) models to fit underlying regimes of a series of interest. This is particularly important in the business cycle literature where one may be interested in determining whether using leading indicators to allow transition probabilities to vary improves the ability of MRS models to fit the NBER business cycle chronology. This is typically done using the quadratic probability score, or QPS (Diebold and Rudebusch, 1989). Although it is possible to statistically compare the QPS statistics for two MRS models using the Diebold and Mariano (1995) (DM) test statistic for comparing forecasts, we find using a Monte Carlo experiment that the DM statistic tends to under-reject (the null of "no difference in forecast accuracy") when comparing MRS models. This we believe is because of the strong non-normality of the forecast errors of such models. Furthermore, using simulation-based inference we demonstrate that leading indicators improve the fit of an MRS model of the US business cycle chronology by 24 percent, such improvement having a p-value of 0.001. Economics Layton, Allan MitwirkendeR ctb Enthalten in Journal of Business Cycle Measurement and Analysis Vol. 2007, no. 1, p. 79-98 volume:2007 year:2007 number:1 pages:79-98 FWS01 ZDB-13-SOC FWS_PDA_SOC https://doi.org/10.1787/jbcma-v2007-art4-en Volltext |
| spellingShingle | Smith, Daniel R.. Comparing Probability Forecasts in Markov Regime Switching Business Cycle Models Economics |
| title | Comparing Probability Forecasts in Markov Regime Switching Business Cycle Models |
| title_auth | Comparing Probability Forecasts in Markov Regime Switching Business Cycle Models |
| title_exact_search | Comparing Probability Forecasts in Markov Regime Switching Business Cycle Models |
| title_full | Comparing Probability Forecasts in Markov Regime Switching Business Cycle Models Daniel R., Smith and Allan, Layton |
| title_fullStr | Comparing Probability Forecasts in Markov Regime Switching Business Cycle Models Daniel R., Smith and Allan, Layton |
| title_full_unstemmed | Comparing Probability Forecasts in Markov Regime Switching Business Cycle Models Daniel R., Smith and Allan, Layton |
| title_short | Comparing Probability Forecasts in Markov Regime Switching Business Cycle Models |
| title_sort | comparing probability forecasts in markov regime switching business cycle models |
| topic | Economics |
| topic_facet | Economics |
| url | https://doi.org/10.1787/jbcma-v2007-art4-en |
| work_keys_str_mv | AT smithdanielr comparingprobabilityforecastsinmarkovregimeswitchingbusinesscyclemodels AT laytonallan comparingprobabilityforecastsinmarkovregimeswitchingbusinesscyclemodels |