Template-Type: ReDIF-Paper 1.0 Series: Tinbergen Institute Discussion Papers Creation-Date: 2011-01-06 Number: 11-002/4 Author-Name: Cem Cakmakli Author-Workplace-Name: Erasmus University Rotterdam Author-Name: Richard Paap Author-Workplace-Name: Erasmus University Rotterdam Author-Name: Dick J.C. van Dijk Author-Workplace-Name: Erasmus University Rotterdam Title: Modeling and Estimation of Synchronization in Multistate Markov-Switching Models Abstract: This paper develops a Markov-Switching vector autoregressive model that allows for imperfect synchronization of cyclical regimes in multiple variables, due to phase shifts of a single common cycle. The model has three key features: (i) the amount of phase shift can be different across regimes (as well as across variables), (ii) it allows the cycle to consist of any number of regimes J is larger than or equal to 2, and (iii) it allows for regime-dependent volatilities and correlations. In an empirical application to monthly returns on size-based stock portfolios, a three-regime model with asymmetric phase shifts and regime-dependent heteroscedasticity is found to characterize the joint distribution of returns most adequately. While large- and small-cap portfolios switch contemporaneously into boom and crash regimes, the large-cap portfolio leads the small-cap portfolio for switches to a moderate regime by a month. Classification-JEL: C11, C32, C51, C52 Keywords: imperfect synchronization, phase shifts, regime-switching models, Bayesian analysis File-Url: https://papers.tinbergen.nl/11002.pdf File-Format: application/pdf File-Size: 330400 bytes Handle: RePEc:tin:wpaper:20110002