This paper researches small-sample properties of the Markov-switching model with time-varying transition probabilities. By means of simulation, it is shown that the likelihood ratio statistic is over-sized for sample sizes relevant in many empirical applications. The number of regime switches...

In the framework of small-scale agent-based financial market models, the paper starts out from the concept of structural stochastic volatility, which derives from different noise levels in the demand of fundamentalists and chartists and the time-varying market shares of the two groups. It...

Extant solutions for state-contingent process switching use first-passage time densities or differential equations. We alternatively employ transition probabilities. These conditional likelihood functions also have obvious appeal for econometric analyses as well as derivative pricing and...