Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2022-04-25
Revision-Date: 2022-01-11
Number: 21-080/III
Author-Name: Erik Kole
Author-Workplace-Name: Erasmus University Rotterdam
Author-Name: Dick van Dijk
Author-Workplace-Name: Erasmus University Rotterdam
Title: Moments, Shocks and Spillovers in Markov-switching VAR Models
Abstract: To investigate how economies, financial markets or institutions can deal with stress, we often analyze
the effects of shocks conditional on a recession or a bear market. MSVAR models are perfectly
suited for such analyses because they combine gradual movements with sudden switches. In this
paper, we develop a comprehensive methodology to conduct these analyses. We derive first and
second moments conditional only on the regime distribution and propose impulse response functions
for both moments. By formulating the MSVAR as an extended linear non-Gaussian VAR, all
results are in closed-form. We illustrate our methods with an application to stock and bond return
predictability. We show how forecasts of means, volatilities and (auto-)correlations depend on the
regimes. The effect of shocks becomes highly nonlinear, and they propagate via different channels.
During bear markets, shocks have stronger e?ects on means and volatilities and die out more slowly.
Keywords: Markov-switching VAR, moments, impulse response analysis, bull and bear markets
Classification-JEL: C32, C58, G01, G17
Keywords: Markov-switching, VAR, moments, impulse response analysis, bull and bear markets
File-URL: https://papers.tinbergen.nl/21080.pdf
File-Format: application/pdf
File-Size: 2,582,120 bytes
Handle: RePEc:tin:wpaper:20210080