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Rational Expectations in a VAR with Markov Switching

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  • Blix, Mårten

    (Sveriges Riksbank)

Abstract

This paper shows how a well known class of rational expectations hypotheses using linear vector autoregressions (VAR:s) can be extended to allow for unobservable Markov switching. The regime shift model used falls into the general framework of Hamilton (1990), but differs to the centered model actually implemented by Hamilton and others. The model here has the advantage that it is easier to estimate, and the intuitive appeal that the state dependence is symmetric. The contribution of the paper is to derive testable restrictions implied by rational expectations, which are linear when the forecast horizon is infinite. The restrictions on the autoregressive parameters are the same as those that appear in the centered model. As an illustration, we duplicate a test of the expectations hypothesis (EH) in Sola & Driffill (1994) on 3 and 6 month US bills on quarterly data, and find that their results may be fragile.

Suggested Citation

  • Blix, Mårten, 1997. "Rational Expectations in a VAR with Markov Switching," Seminar Papers 627, Stockholm University, Institute for International Economic Studies.
    • Handle: RePEc:hhs:iiessp:0627
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    References listed on IDEAS

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    1. Tauchen, George, 1985. "Diagnostic testing and evaluation of maximum likelihood models," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 415-443.
    2. Baillie, R.T., 1988. "Econometric Tests Of Rationality And Market Efficiency," Papers 8805, Michigan State - Econometrics and Economic Theory.
    3. Engel, Charles & Hamilton, James D, 1990. "Long Swings in the Dollar: Are They in the Data and Do Markets Know It?," American Economic Review, American Economic Association, vol. 80(4), pages 689-713, September.
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    11. Newey, Whitney K, 1985. "Maximum Likelihood Specification Testing and Conditional Moment Tests," Econometrica, Econometric Society, vol. 53(5), pages 1047-1070, September.
    12. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
    13. Hamilton, James D., 1988. "Rational-expectations econometric analysis of changes in regime : An investigation of the term structure of interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 385-423.
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    Cited by:

    1. Arielle Beyaert & Juan Jose Perez-Castejon, 2009. "Markov-switching models, rational expectations and the term structure of interest rates," Applied Economics, Taylor & Francis Journals, vol. 41(3), pages 399-412.
    2. Nicolas Rautureau, 2004. "Modèles à changement de régime et test de la théorie des anticipations rationnelles de la structure par terme des taux dintérêt en France," Économie et Prévision, Programme National Persée, vol. 163(2), pages 117-129.
    3. Matthieu Droumaguet & Anders Warne & Tomasz Wozniak, 2015. "Granger Causality and Regime Inference in Bayesian Markov-Switching VARs," Department of Economics - Working Papers Series 1191, The University of Melbourne.
    4. Beyaert, Arielle & Garcia-Solanes, Jose & Perez-Castejon, Juan J., 2007. "Uncovered interest parity with switching regimes," Economic Modelling, Elsevier, vol. 24(2), pages 189-202, March.

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    More about this item

    Keywords

    VAR; Markov chain; regime switching; rational expectations; expectations hypothesis;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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