ABSTRACT This paper introduces a Bayesian Markov regime-switching model that allows the cointegration relationship between two time series to be switched on and off over time. Unlike classical approaches for testing and modeling cointegration, the Bayesian Markov switching method allows for estimation of the regime-specific model parameters via Markov Chain Monte Carlo and generates more reliable estimation. Inference of regime switching also provides important information for further analysis and decision making.
Cite this paper
K. Cui and W. Cui, "Bayesian Markov Regime-Switching Models for Cointegration," Applied Mathematics, Vol. 3 No. 12, 2012, pp. 1892-1897. doi: 10.4236/am.2012.312259.
 R. F. Engle and C. W. J. Granger, “Co-integration and Error Correction: Representation, Estimation, and Testing,” Econometrica, Vol. 55, No. 2, 1987, pp. 251-276.
 H. Puspaningrum, “Pairs Trading Using Cointegration Approach,” Ph.D. Thesis, University of Wollongong, Wollongong, 2012.
 J. Campos and N. R. Ericsson and D. F. Hendry, “Cointegration Tests in the Presence of Structural Breaks,” International Finance Discussion Papers 440, Board of Governors of the Federal Reserve System (US), 1996.
 E. G. Gatev and W. Goetzmann and K. G. Rouwenhorst, “Pairs Trading: Performance of a Relative Value Arbitrage Rule,” Boston College, Boston, 2006.
 A. W. Gregory and B. E. Hansen, “Residual-Based Tests for Cointegration in Models with Regime Shifts,” Journal of Econometrics, Vol. 70, No. 1, 1996, pp. 99-126.
 D. A. Dickey and W. A. Fuller, “Distribution of the Estimators for Autoregressive Time Series With a Unit Root,” Journal of the American Statistical Association, Vol. 74, No. 366, 1979, pp. 427-431. doi:10.2307/2286348
 G. E. B. Archer and D. M. Titterington, “Parameter Estimation for Hidden Markov Chains,” Journal of Statistical Planning and Inference, Vol. 108, No. 1, 2002, pp. 365-390. doi:10.1016/S0378-3758(02)00318-X
 E. P. Chan, “Quantitative Trading,” John Wiley and Sons, Hoboken, 2008.
 C. P. Robert, T. Ryden and D. M. Titterington, “Bayesian Inference in Hidden Markov Models through the Reversible Jump Markov Chain Monte Carlo Method,” Journal of The Royal Statistical Society Series B, Vol. 62, No. 1, 2000, pp. 57-75. doi:10.1111/1467-9868.00219