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Preprints, Working Papers, ... Year : 2012

Conditional Markov regime switching model applied to economic modelling.

Stéphane Goutte
  • Function : Correspondent author
  • PersonId : 950817

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Abstract

In this paper we discuss the calibration issues of regime switching models built on mean-reverting and local volatility processes combined with two Markov regime switch- ing processes. In fact, the volatility structure of this model depends on a first exogenous Markov chain whereas the drift structure depends on a conditional Markov chain with re- spect to the first one. The structure is also assumed to be Markovian and both structure and regime are unobserved. Regarding this construction, we extend the classical Expectation- Maximization (EM) algorithm to be applied to our regime switching model. We apply it to economic datas (Euro-Dollars foreign exchange rate and Brent oil price) to show that this modelling well identifies both mean reverting and volatility regimes switches. More- over, it allows us to give economic interpretations of this regime classification such as some financial crisis or some economic policies.
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Dates and versions

hal-00747479 , version 1 (31-10-2012)
hal-00747479 , version 2 (10-01-2014)

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  • HAL Id : hal-00747479 , version 2

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Stéphane Goutte. Conditional Markov regime switching model applied to economic modelling.. 2012. ⟨hal-00747479v2⟩
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