Monica Billio () (Department of Economics, University Of Venice Ca’ Foscari) Silvestro Di Sanzo (Departamento de Fundamentos del Analisis Economico, Universidad de Alicante)
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In this paper we propose a new parametrisation of transition probabilities that allows us to characterize and test Granger-causality in Markov switching models by means of an appropriate specification of the transition matrix. Test for independence are also provided. We illustrate our methodology with an empirical application. In particular, we investigate the causality and interdependence between financial and economic cycles using a bivariate Markov switching model. When applied to U.S. data, we find that financial variables are useful for forecasting the direction of aggregate economic activity, and vice versa.
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Paper provided by University of Venice "Ca' Foscari", Department of Economics in its series Working Papers with number
2006_20.
Find related papers by JEL classification: C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
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