Characteristic of Markov Switching Model: An Autoregressive Model

Abstract

The objective of this paper is to explore the issue of whether the numbers of regimes and variables in aggregate time series are similar to those in individual time series. Equal and value weighted methods of aggregation are considered. A Monte Carlo simulation is carried out with different settings to investigate possible sources of changes those could affect the characteristic of aggregate time series. The results show that the numbers of regimes and variables in aggregate time series is a function of those of individual time series, regardless of the aggregation method. When combining two individual time series (e.g., one series has two regimes and one lag, while another time series has three regimes and one lag), for instance, the numbers of regimes and variables in aggregate time series would be two and one, respectively.