A new regime switching model with state–varying endogeneity

Tingting Cheng, Jiti Gao, Yayi Yan

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Abstract

In this paper, we propose a state-varying endogenous regime switching model (the SERS model), which includes the endogenous regime switching model by Chang et al., the CCP model, as a special case. To estimate the unknown parameters in the SERS model, we propose a maximum likelihood estimation method. Monte Carlo simulation results show that in the absence of state-varying endogeneity, the SERS model and the CCP model perform similarly, while in the presence of state-varying endogeneity, the SERS model performs much better than the CCP model. Finally, we use the SERS model to analyze Chinese stock market returns, and our empirical results show that there exists strongly state-varying endogeneity in volatility switching for the Shanghai Composite Index returns. Moreover, the SERS model can indeed produce a much more realistic assessment for the regime switching process than the one obtained by the CCP model.

Original languageEnglish
Pages (from-to)214-231
Number of pages18
JournalJournal of Management Science and Engineering
Volume3
Issue number4
DOIs
Publication statusPublished - Dec 2018

Keywords

  • Latent factor
  • Markov chain
  • Maximum likelihood estimation
  • Regime switching models
  • State-varying endogeneity

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