Hi Muhammad,
To create a two-factor regime-switching model in MATLAB, you can use the "msVAR" function, which is part of the Econometrics Toolbox. Follow the steps below to set up your model:
- Use the "dtmc" function to define the regimes with a transition matrix specifying switching probabilities.
- Define submodels for each regime using "arima" to create autoregressive models like AR(2) and AR(1).
- Combine the submodels and the Markov chain into a single model using the "msVAR" function.
Below is a MATLAB script illustrating these steps:
% Define the states and transition probabilities
numStates = 2;
P = [0.9 0.1; 0.3 0.7]; % Transition matrix
stateNames = ["Expansion" "Recession"];
mc = dtmc(P, 'StateNames', stateNames);
% Define AR models for each state
C1 = 5; % Constant for expansion state
AR1 = [0.3, 0.2]; % AR coefficients for expansion state
v1 = 2; % Variance for expansion state
mdl1 = arima('Constant', C1, 'AR', AR1, 'Variance', v1, 'Description', 'Expansion State');
C2 = -5; % Constant for recession state
AR2 = 0.1; % AR coefficient for recession state
v2 = 1; % Variance for recession state
mdl2 = arima('Constant', C2, 'AR', AR2, 'Variance', v2, 'Description', 'Recession State');
% Combine submodels
mdl = [mdl1; mdl2];
% Create Markov-Switching model
Mdl = msVAR(mc, mdl);
% Display model properties
disp(Mdl);
For more information, refer to the following MathWorks documentation links:
- Regine-Switching Models: https://mathworks.com/help/releases/R2024a/econ/regime-switching-models.html
- Markov-Switching Dynamic Regression Models: https://mathworks.com/help/releases/R2024a/econ/markov-switching-dynamic-regression-models.html
Hope this helps.
