Markov-Switching Models with Applications in Macroeconomics and Finance

Abstract

Many economic and financial data seem to change their behavior depending on the business cycle and/or policy regime. In this paper, we review the Markov switching (MS) model as one of the most powerful tools to analyze such economic and financial data with switching regimes. More specifically, following the brief introduction of the MS model, we discuss the Markov chain which is an important component of the model and explain how to interpret the MS model using a simple example. Lastly, we argue the statistical inference associated with the MS model and provide some applications to macroeconomics and finance.