Advantages and disadvantages of using markov switching model

Reference no: EM131162155

1. a. Discuss the advantages and disadvantages of using a Markov Switching model instead of dummy variable to capture structural breaks.

b. In a Markov Switching Model, what is the difference between increasing the number of regimes and increasing the order of the Markov chain? Which one will you choose to improve the forecasting performance of a first-order Markov switching model with two regimes for GDP growth rate? Why?

Reference no: EM131162155

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