Maximum Likelihood Estimation in Markov Regime-Switching Models With Covariate-Dependent Transition Probabilities
Demian Pouzo, Zacharias Psaradakis, Martin Sola
Econometrica · 2022 · Volume 90 · Issue 4
Abstract
This paper considers maximum likelihood (ML) estimation in a large class of models with hidden Markov regimes. We investigate consistency of the ML estimator and local asymptotic normality for the models under general conditions, which allow for autoregressive dynamics in the observable process, Markov regime sequences with covariate-dependent transition matrices, and possible model misspecification. A Monte Carlo study examines the finite-sample properties of the ML estimator in correctly specified and misspecified models. An empirical application is also discussed.
Keywords
Autoregressive models, consistency, covariate-dependent transition probabilities, hidden Markov model, Markov-switching model, maximum likelihood, local asymptotic normality, misspecified models
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