Markov-switching models with endogenous explanatory variables II

A two-step MLE procedure

Research output: Contribution to journalArticle

14 Citations (Scopus)

Abstract

This paper proposes a two-step maximum likelihood estimation (MLE) procedure to deal with the problem of endogeneity in Markov-switching regression models. A joint estimation procedure provides us with an asymptotically most efficient estimator, but it is not always feasible, due to the 'curse of dimensionality' in the matrix of transition probabilities. A two-step estimation procedure, which ignores potential correlation between the latent state variables, suffers less from the 'curse of dimensionality', and it provides a reasonable alternative to the joint estimation procedure. In addition, our Monte Carlo experiments show that the two-step estimation procedure can be more efficient than the joint estimation procedure in finite samples, when there is zero or low correlation between the latent state variables.

Original languageEnglish
Pages (from-to)46-55
Number of pages10
JournalJournal of Econometrics
Volume148
Issue number1
DOIs
Publication statusPublished - 2009 Jan 1

Fingerprint

Markov Switching Model
Maximum likelihood estimation
Maximum Likelihood Estimation
Curse of Dimensionality
Endogeneity
Markov Switching
Efficient Estimator
Monte Carlo Experiment
Transition Probability
Markov switching model
Regression Model
Alternatives
Zero
Experiments

Keywords

  • Control function approach
  • Curse of dimensionality
  • Endogeneity
  • Markov switching
  • Smoothed probability
  • Two-step estimation procedure

ASJC Scopus subject areas

  • Economics and Econometrics
  • Applied Mathematics
  • History and Philosophy of Science

Cite this

Markov-switching models with endogenous explanatory variables II : A two-step MLE procedure. / Kim, Chang-Jin.

In: Journal of Econometrics, Vol. 148, No. 1, 01.01.2009, p. 46-55.

Research output: Contribution to journalArticle

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