NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Long Memory and Regime Switching

Francis X. Diebold, Atsushi Inoue

NBER Technical Working Paper No. 264
Issued in November 2000
NBER Program(s):   TWP

The theoretical and empirical econometric literatures on long memory and regime switching have evolved largely independently, as the phenomena appear distinct. We argue, in contrast, that they are intimately related, and we substantiate our claim in several environments, including a simple mixture model, Engle and Lee's (1999) stochastic permanent break model, and Hamilton's (1989) Markov switching model. In particular, we show analytically that stochastic regime switching is easily confused with long memory, even asymptotically, so long as only a small' amount of regime switching occurs, in a sense that we make precise. A Monte Carlo analysis supports the relevance of the theory and produces additional insights.

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Document Object Identifier (DOI): 10.3386/t0264

Published: Diebold, Francis X. and Atsushi Inoue. "Long Memory And Regime Switching," Journal of Econometrics, 2001, v105(1,Nov), 131-159.

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