MSVARSETUP—Markov Switch VAR Setup (obsolete)

[TomDoan]

There is a newer version of this at http://www.estima.com/forum/viewtopic.php?f=7&t=512

[rocolave]

I have a number of queries with respect to the revised MS VAR procedure:

1) Can RATS 6.3 be used to execute the procedure?

I tried to run the code which does the univariate Hamilton model on GDP, using MSVARSETUP but I get the following error messages:

## SX22. Expected Type REAL, Got VECTOR(VECTOR) Instead
>>>>rmset=varparms) mu <<<<


2) As far as I have understood, the SWITCH option allows for either the MEAN or the INTERCEPT to switch. Would it be possible to estimate a specification where also the VAR autoregressive coefficients are regime-dependent?

3) The variance/covariance matrix: when "HETEROGENEOUS" is chosen for the VARIANCE option, the variances are allowed to be regime-dependent. What about the covariances? Is the var/cov matrix diagonal?

4) I am not clear about the meaning of the "mask" matrix

5) Does the MSVARSETUP allow to calculate impulse response functions? If yes, could you indicate how? If no, do you have any suggestion about how to implement that?

Thank you very much in advance for your kind help!

[nazif]

Dear Doan,
Thanks for MSVAR code allowing for switching mean and intercept. But as far as I know determining number of regimes is very tricky in this kind of models and often subject to harsh criticisim by referees.
Krolzig and the other authors having MSVAR code and programs are not clear about this. How can we determine number of states in this code? is there any formal test for or do we have to calculate some information criterias like AIC or BIC? is it possible to conduct some diagnostics on the residuals of MSVAR model by which allows us to reach a decision on the true model.
Thanks again.
Nazif

[TomDoan]

At least in the case of a VAR, it's highly unlikely that an information criterion will be helpful. The extra state pulls in so many extra parameters that it's almost impossible for the improved fit to be worth the "cost". If two states are adequate, a three state model has a huge number of redundant parameters. The sheer impossibility of getting the expanded model to converge is likely to be a good sign that it isn't necessary.

[nazif]

Dear Doan
Thanks for your answer.
I know It's to much but I have another. In case of unit root do we have to first difference of the variables when we're running this code? I've read lots of paper but couldn't get the clear answer.
Thanks again

[condor]

Regime switching behaviour itself might introduce unit root. Performance of the regular unit root tests are not promising in the case of regime switching. You can find a nice working paper on the subject here: http://research.stlouisfed.org/wp/2001/2001-013.pdf. I think, you can first build your model as is, and then look for tracks of unit root afterwards. If you find any evidence on unit root, then you can try the usual remedies.

[TomDoan]

Dear Doan
Thanks for your answer.
I know It's to much but I have another. In case of unit root do we have to first difference of the variables when we're running this code? I've read lots of paper but couldn't get the clear answer.
Thanks again

Because the VAR part is all conditional on past y's, there's nothing about this that is sensitive to unit roots. The biggest question would be the treatment of any exogenous variables, since the "constant" switches its meaning when you have unit roots.