Evaluating Specification Tests for Markov-Switching Time-Series Models
Smith, Daniel R. (2008) Evaluating Specification Tests for Markov-Switching Time-Series Models. Journal of Time Series Analysis, 29(4), pp. 629-652.
We evaluate the performance of several specification tests for Markov regime-switching time-series models. We consider the Lagrange multiplier (LM) and dynamic specification tests of Hamilton (1996) and Ljung–Box tests based on both the generalized residual and a standard-normal residual constructed using the Rosenblatt transformation. The size and power of the tests are studied using Monte Carlo experiments. We find that the LM tests have the best size and power properties. The Ljung–Box tests exhibit slight size distortions, though tests based on the Rosenblatt transformation perform better than the generalized residual-based tests. The tests exhibit impressive power to detect both autocorrelation and autoregressive conditional heteroscedasticity (ARCH). The tests are illustrated with a Markov-switching generalized ARCH (GARCH) model fitted to the US dollar–British pound exchange rate, with the finding that both autocorrelation and GARCH effects are needed to adequately fit the data.
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|Item Type:||Journal Article|
|Keywords:||Markov regime-switching, Lagrange multiplier , specification tests , autocorrelation , ARCH|
|Divisions:||Current > QUT Faculties and Divisions > QUT Business School
Current > Schools > School of Economics & Finance
|Copyright Owner:||John Wiley & Sons|
|Deposited On:||19 Feb 2010 05:20|
|Last Modified:||29 Feb 2012 13:56|
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