A Markov switching unobserved component analysis of the CDX index term premium

Using a Markov switching unobserved component model we decompose the term premium of the North American CDX index into a permanent and a stationary component. We establish that the inversion of the CDX term premium is induced by sudden changes in the unobserved stationary component, which represents the evolution of the fundamentals underpinning the probability of default in the economy. We find evidence that the monetary policy response from the Fed during the crisis period was effective in reducing the volatility of the term premium. We also show that equity returns make a substantial contribution to the term premium over the entire sample period.

Real interest rates, inflation and the open economy : a regime-switching perspective on Australia and New Zealand

We investigate the time-series properties of Australian and New Zealand real interest rates within a Markov-switching framework. This enables us to identify characteristics in real interest rate behavior hitherto unacknowledged. We find that rates switch between alternative stationary regimes characterized by differing means, speeds of mean-reversion and volatility. For New Zealand, high rates of inflation increase the probability of remaining in a regime characterized by a faster speed of adjustment. Further application of this methodology considers the real interest rate differential between Australia and New Zealand and points to differing regimes based on volatility rather than persistence.

Dynamic hedging in Markov regimes

This dissertation proposes a bivariate markov switching dynamic conditional correlation model for estimating the optimal hedge ratio between spot and futures contracts. It considers the cointegration between series and allows to capture the leverage efect in return equation. The model is applied using daily data of future and spot prices of Bovespa Index and R$/US$ exchange rate. The results in terms of variance reduction and utility show that the bivariate markov switching model outperforms the strategies based ordinary least squares and error correction models.

Economic crises and tourism competitiveness: A Markov swtiching regression approach

Authors discuss the effects that economic crises generate on the global market shares of tourism destinations, through a series of potential transmission mechanisms based on the main economic competitiveness determinants identified in the previous literature using a non-linear approach. Specifically a Markov Switching Regression approach is used to estimate the effect of two basic transmission mechanisms: reductions of internal and external tourism demands and falling investment.

A comparison of two business cycle dating methods

We study the suggestion that Markov switching (MS) models should be used to determine cyclical turning points. A Kalman filter approximation is used to derive the dating rules implicit in such models. We compare these with dating rules in an algorithm that provides a good approximation to the chronology determined by the NBER. We find that there is very little that is attractive in the MS approach when compared with this algorithm. The most important difference relates to robustness. The MS approach depends on the validity of that statistical model. Our approach is valid in a wider range of circumstances.

Modelling Spikes in Electricity Prices

uring periods of market stress, electricity prices can rise dramatically. Electricity retailers cannot pass these extreme prices on to customers because of retail price regulation. Improved prediction of these price spikes therefore is important for risk management. This paper builds a time-varying-probability Markov-switching model of Queensland electricity prices, aimed particularly at forecasting price spikes. Variables capturing demand and weather patterns are used to drive the transition probabilities. Unlike traditional Markov-switching models that assume normality of the prices in each state, the model presented here uses a generalised beta distribution to allow for the skewness in the distribution of electricity prices during high-price episodes.

Does the price of oil interact with clean energy prices in the stock market?

In this paper, we analyze the relationships among oil prices, clean energy stock prices, and technology stock prices, endogenously controlling for structural changes in the market. To this end, we apply Markov-switching vector autoregressive models to the economic system consisting of oil prices, clean energy and technology stock prices, and interest rates. The results indicate that there was a structural change in late 2007, a period in which there was a significant increase in the price of oil. In contrast to the previous studies, we find a positive relationship between oil prices and clean energy prices after structural breaks. There also appears to be a similarity in terms of the market response to both clean energy stock prices and technology stock prices. © 2013 Elsevier B.V.

Do socially responsible investment indexes outperform conventional indexes?

The question of whether more Socially Responsible (SR) firms outperform or underperform other conventional firms has been debated in the economic literature. In this study, using the Socially Responsible Investment (SRI) indexes and conventional stock indexes in the US, the UK and Japan, first and second moments of firm performance distributions are estimated based on the Markov Switching (MS) model. We find two distinct regimes (bear and bull) in the SRI markets as well as the stock markets for all the three countries. These regimes occur with the same timing in both types of market. No statistical difference in means and volatilities generated from the SRI indexes and conventional indexes in either region was found. Furthermore, we find strong comovements between the two indexes in both the regimes.

An Alternative View of the US Price-Dividend Ratio Dynamics

As a necessary condition for the validity of the present value model, the price-dividend ratio must be stationary. However, significant market episodes seem to provide evidence of prices significantly drifting apart from dividends while other episodes show prices anchoring back to dividends. This paper investigates the stationarity of this ratio in the context of a Markov- switching model à la Hamilton (1989) where an asymmetric speed of adjustment towards a unique attractor is introduced. A three-regime model displays the best regime identification and reveals that the first part of the 90’s boom (1985-1995) and the post-war period are characterized by a stationary state featuring a slow reverting process to a relatively high attractor. Interestingly, the latter part of the 90’s boom (1996-2000), characterized by a growing price-dividend ratio, is entirely attributed to a stationary regime featuring a highly reverting process to the attractor. Finally, the post-Lehman Brothers episode of the subprime crisis can be classified into a temporary nonstationary regime.

Estímulos fiscais e a interação entre as políticas monetária e fiscal no Brasil

Este trabalho estima, utilizando dados trimestrais de 1999 a 2011, o impacto dinâmico de um estímulo fiscal no Brasil sobre as principais variáveis macroeconômicas Brasileiras. Na estimativa dos impactos permitiu-se que as expectativas dos agentes econômicas fossem afetadas pela existência e probabilidade de alternância de regimes (foram detectados dois regimes) na política monetária do país. Os parâmetros da regra da política monetária, nos dois regimes detectados, foram estimados através de um modelo - composto apenas pela equação da regra da política monetária - que permite uma mudança de regime Markoviana. Os parâmetros do único regime encontrado para a política fiscal foram estimados por um modelo Vetorial de Correção de Erros (Vector Error Correction Model - VEC), composto apenas pelas variáveis pertencentes à regra da política fiscal. Os parâmetros estimados, para os diversos regimes das políticas monetária e fiscal, foram utilizados como auxiliares na calibragem de um modelo de equilíbrio geral estocástico dinâmico (MEGED), com mudanças de regime, com rigidez nominal de preços e concorrência monopolística (como em Davig e Leeper (2011)). Após a calibragem do MEGED os impactos dinâmicos de um estímulo fiscal foram obtidos através de uma rotina numérica (desenvolvida por Davig e Leeper (2006)) que permite obter o equilíbrio dinâmico do modelo resolvendo um sistema de equações de diferenças de primeira ordem expectacionais dinâmicas não lineares. Obtivemos que a política fiscal foi passiva durante todo o período analisado e que a política monetária foi sempre ativa, porém sendo em determinados momentos menos ativa. Em geral, em ambas as combinações de regimes, um choque não antecipado dos gastos do governo leva ao aumento do hiato do produto, aumento dos juros reais, redução do consumo privado e (em contradição com o resultado convencional) redução da taxa de inflação.

Mudanças de Estado e Multiplicadores Fiscais no Brasil entre 1999-2012

Este trabalho avalia o comportamento dos multiplicadores fiscais no Brasil entre 1999-2012. Para tanto, utiliza a metodologia desenvolvida por Sims, Waggoner e Zha (2008), que é um procedimento Bayesiano de estimação no qual os parâmetros do modelo mudam com alterações no estado da economia e os estados (regimes) seguem um processo de mudança de regime markoviano. Ou seja, foi estimado um modelo VAR Estrutural Bayesiano com mudança de regimes Markoviana (Markov Switching Structural Bayesian Vector Autoregression - MS-SBVAR). A base de dados é composta pelo consumo da administração pública, pela formação bruta de capital fixo da administração pública, pela carga tributária líquida e pelo Produto Interno Bruto (PIB), das três esferas do governo (federal, estadual, incluindo o Distrito Federal, e municipal). O software MATLAB/Dynare foi utilizado na estimação dos modelos e os resultados sugerem a ocorrência de 2 ou 3 regimes nos dois modelos que melhor se ajustaram aos dados. Os multiplicadores estimados apresentaram os sinais esperados e os diferentes tipos de multiplicadores fiscais calculados apresentaram valores maiores para a resposta do PIB a choques na formação bruta de capital fixo da administração pública que são eficazes, uma vez que possuem valores maiores do que um e impacto de longo prazo no PIB - quando comparado aos choques no consumo da administração pública, que possuem pouca persistência e são ineficazes (menores do que um), além de uma resposta negativa e persistente do PIB a choques na carga tributária líquida. Os resultados obtidos não indicam, ainda, multiplicadores fiscais maiores em regimes com maior variância nos resíduos do modelo.

Estimation du modèle GARCH à changement de régimes et son utilité pour quantifier le risque de modèle dans les applications financières en actuariat

Le modèle GARCH à changement de régimes est le fondement de cette thèse. Ce modèle offre de riches dynamiques pour modéliser les données financières en combinant une structure GARCH avec des paramètres qui varient dans le temps. Cette flexibilité donne malheureusement lieu à un problème de path dependence, qui a empêché l'estimation du modèle par le maximum de vraisemblance depuis son introduction, il y a déjà près de 20 ans. La première moitié de cette thèse procure une solution à ce problème en développant deux méthodologies permettant de calculer l'estimateur du maximum de vraisemblance du modèle GARCH à changement de régimes. La première technique d'estimation proposée est basée sur l'algorithme Monte Carlo EM et sur l'échantillonnage préférentiel, tandis que la deuxième consiste en la généralisation des approximations du modèle introduites dans les deux dernières décennies, connues sous le nom de collapsing procedures. Cette généralisation permet d'établir un lien méthodologique entre ces approximations et le filtre particulaire. La découverte de cette relation est importante, car elle permet de justifier la validité de l'approche dite par collapsing pour estimer le modèle GARCH à changement de régimes. La deuxième moitié de cette thèse tire sa motivation de la crise financière de la fin des années 2000 pendant laquelle une mauvaise évaluation des risques au sein de plusieurs compagnies financières a entraîné de nombreux échecs institutionnels. À l'aide d'un large éventail de 78 modèles économétriques, dont plusieurs généralisations du modèle GARCH à changement de régimes, il est démontré que le risque de modèle joue un rôle très important dans l'évaluation et la gestion du risque d'investissement à long terme dans le cadre des fonds distincts. Bien que la littérature financière a dévoué beaucoup de recherche pour faire progresser les modèles économétriques dans le but d'améliorer la tarification et la couverture des produits financiers, les approches permettant de mesurer l'efficacité d'une stratégie de couverture dynamique ont peu évolué. Cette thèse offre une contribution méthodologique dans ce domaine en proposant un cadre statistique, basé sur la régression, permettant de mieux mesurer cette efficacité.

Asymmetries in Business Cycles

Esta disertación busca estudiar los mecanismos de transmisión que vinculan el comportamiento de agentes y firmas con las asimetrías presentes en los ciclos económicos. Para lograr esto, se construyeron tres modelos DSGE. El en primer capítulo, el supuesto de función cuadrática simétrica de ajuste de la inversión fue removido, y el modelo canónico RBC fue reformulado suponiendo que des-invertir es más costoso que invertir una unidad de capital físico. En el segundo capítulo, la contribución más importante de esta disertación es presentada: la construcción de una función de utilidad general que anida aversión a la pérdida, aversión al riesgo y formación de hábitos, por medio de una función de transición suave. La razón para hacerlo así es el hecho de que los individuos son aversos a la pérdidad en recesiones, y son aversos al riesgo en auges. En el tercer capítulo, las asimetrías en los ciclos económicos son analizadas junto con ajuste asimétrico en precios y salarios en un contexto neokeynesiano, con el fin de encontrar una explicación teórica de la bien documentada asimetría presente en la Curva de Phillips.

Option pricing in market models driven by telegraph processes with jumps

Esta tesis está dividida en dos partes: en la primera parte se presentan y estudian los procesos telegráficos, los procesos de Poisson con compensador telegráfico y los procesos telegráficos con saltos. El estudio presentado en esta primera parte incluye el cálculo de las distribuciones de cada proceso, las medias y varianzas, así como las funciones generadoras de momentos entre otras propiedades. Utilizando estas propiedades en la segunda parte se estudian los modelos de valoración de opciones basados en procesos telegráficos con saltos. En esta parte se da una descripción de cómo calcular las medidas neutrales al riesgo, se encuentra la condición de no arbitraje en este tipo de modelos y por último se calcula el precio de las opciones Europeas de compra y venta.

House price dynamics and their reaction to macroeconomic changes

This article applies a three-regime Markov switching model to investigate the impact of the macroeconomy on the dynamics of the residential real estate market in the US. Focusing on the period between 1960 and 2011, the methodology implemented allows for a clearer understanding of the drivers of the real estate market in “boom”, “steady-state” and “crash” regimes. Our results show that the sensitivity of the real estate market to economic changes is regime-dependent. The paper then proceeds to examine whether policymakers are able to influence a regime switch away from the crash regime. We find that a decrease in interest rate spreads could be an effective catalyst to precipitate such a change of state.