Results from Markov Switching Models

Abstract

In a symmetrical approach to what we do in Chapter 4, in this chapter, we estimate two MSVAR models, one for the yields and one for the spreads. First, we present our specification search, which in this case concerns not only the appropriate number of lags, but also the most adequate type of Markov switching model and the appropriate number of regimes. We identify the MSIH(3,1) model as the most adequate to fit the data. Furthermore, we try to provide an economic interpretation of the three regimes that we identify. Finally, we discuss the results of the estimation of these models and their economic interpretation.