A Bayesian Change Point with Regime Switching Model

P. Pastpipatkul, S. Sriboonchitta, W. Yamaka

Abstract

This paper extends the threshold model to Markov Switching modelin order to relax a linear function between dependent and independent variables. The model allows non-linear function using the idea of Threshold model. We con-ducted both simulation and real data studies to evaluate the performance of theproposed model and found that the model performs well in both simulation andapplication studies. The application study revealed the negative impact of unem-ployment rate on industry production index when the market stays in recessionand depression period. Conversely, the positive impact of Unemployment rateto Industry Production index is empirically evident during expansion and boomperiod.