In this paper we discuss the calibration issues of models built on mean-reverting processes combined with Markov switching. Due to the unobservable switching mechanism, estimation of Markov regime-switching (MRS) models requires inferring not only the model parameters but also the state process...

Many economic time series exhibit dramatic breaks associated with events such as economic recessions, financial panics, and currency crises. Such changes in regime may arise from tipping points or other nonlinear dynamics and are core to some of the most important questions in macroeconomics....