Specification Testing of Markov Switching Models

This paper proposes a set of formal tests to address the goodness-of-fit of Markov switching models. These formal tests are constructed as tests of model consistency and of both parametric and non-parametric encompassing. The formal tests are then combined with informal tests using simulation in combination with non-parametric density and conditional mean estimation. The informal tests are shown to be useful in shedding light on the failure (or success) of the encompassing tests. Several examples are provided. Copyright 2003 Blackwell Publishing Ltd.