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Why Markov Switching Models Work Well: An Explanation

Woraphon Yamaka

Faculty of Economics, Chiang Mai University, Chiang Mai, Thailand

E-mail Address: woraphon.econ@gmail.com

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and

Laxman Bokati

Computational Science Program, University of Texas at El Paso, 500 W. University, El Paso, Texas 79968, USA

E-mail Address: lbokati@miners.utep.edu

Corresponding author.

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https://doi.org/10.1142/S0218488523400160Cited by:1 (Source: Crossref)

This article is part of the issue:

Special Issue on Uncertainty in Economics and Finance

Abstract

In general, the probability of the next state depends not only on the current state, but also on the whole pre-history. However, in practice, many real-life processes — including economic processes — can be well described by so-called Markov models, i.e., models in which the probability of the next state depends only on the current state. In this paper, we explain the empirical ubiquity of such models.

Keywords:

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