New model allows accurate estimation of regime-switching regressions with endogenous switching.
Researchers developed a new model for estimating Markov regime-switching regressions that considers the possibility of the switching variable being influenced by the system itself. By making minor adjustments to existing methods, they were able to accurately estimate the parameters of this endogenous switching model. This model was tested in simulations and applied to a volatility feedback model for equity returns, showing promising results even with some model inaccuracies.