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สถาบันวิจัยเศรษฐกิจป๋วย อึ๊งภากรณ์
Puey Ungphakorn
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Call for Papers: PIER Research Workshop 2025
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Discussion Paperdp
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Year
2025
2024
2023
2022
...
29 February 2024
20241709164800000
No. 217

An Estimation of Regime Switching Models with Nonlinear Endogenous Switching

Abstract

This paper proposes an approach to develop regime switching models where latent process determining the switching is endogenously controlled by the model shocks with free functional forms. The linear endogeneity assumption in the conventional endogenous regime switching models can therefore be relaxed. A recursive filter technique is applied to proceed maximum likelihood estimation in order to estimate the model parameters. A nonlinear endogenous two-regime switching mean-volatility model is conducted in numerical examples to investigate the model performance. In the examples, the endogeneity in switching allows heterogeneous effects of the shock signs (asymmetric endogeneity) and of the states being before the switching determination (state-dependent endogeneity). Monte Carlo simulations show that the conventional switching model ignoring the nonlinear endogeneity leads to the volatility biases. The estimates tend to be over or under their true value depending on how the endogeneity characteristics are. In particular, the true model that accounts the nonlinear endogeneity effectively provides the more precise estimates. The same model is also applied to real data of excess returns on US stock market, and the estimation results informatively describe the effects influencing the regime shifts.

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JEL: C13C32
Tags: nonlinear endogeneityregime switchingmaximum likelihood estimationasymmetric endogeneitystate-dependent endogeneity
The views expressed in this workshop do not necessarily reflect the views of the Puey Ungphakorn Institute for Economic Research or the Bank of Thailand.
Chotipong Charoensom
Chotipong Charoensom
Bank of Thailand

Puey Ungphakorn Institute for Economic Research

273 Samsen Rd, Phra Nakhon, Bangkok 10200

Phone: 0-2283-6066

Email: pier@bot.or.th

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