What causes the forecasting failure of Markov-switching models ? A Monte Carlo study
Bouabdallah, Othman; Bessec, Marie (2005), What causes the forecasting failure of Markov-switching models ? A Monte Carlo study, Studies in Nonlinear Dynamics & Econometrics, 9, 2, p. article 6
TypeArticle accepté pour publication ou publié
Journal nameStudies in Nonlinear Dynamics & Econometrics
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Abstract (EN)This paper explores the forecasting abilities of Markov-Switching models. Although MS models generally display a superior in-sample ﬁt relative to linear models, the gain in prediction remains small. We conﬁrm this result using simulated data for a wide range of speciﬁcations. In order to explain this poor performance, we use a forecasting error decomposition. We identify four components and derive their analytical expressions in diﬀerent MS speciﬁcations. The relative contribution of each source is assessed through Monte Carlo simulations. We ﬁnd that the main source of error is due to the misclassiﬁcation of future regimes.
Subjects / KeywordsMarkov Switching; Regime Shifts; Forecasting
JELC53 - Forecasting and Prediction Methods; Simulation Methods
C32 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
C22 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
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