An occurrence based regime switching model to improve forecasting

Abstract

Purpose

The purpose of this paper is to propose an occurrence-based model to improve the forecasting of regime switches so as to assist decision making.

Design/methodology/approach

This paper proposes a novel model where occurrences of relationships are taken into account when forecasting. Taiwan Stock Exchange Capitalization Weighted Stock Index is taken as the forecasting target.

Findings

Due to the consideration of occurrences of relationships in forecasting, the out of sample forecasting is improved.

Practical implications

The proposed model can be applied to forecast other time series for regime switches. In addition, it can be integrated with other time series models to improve forecasting performance.

Originality/value

The empirical results show that the proposed model can improve the forecasting performance.

Citation

Huarng, K.-H. (2014), "An occurrence based regime switching model to improve forecasting", Management Decision, Vol. 52 No. 7, pp. 1255-1262. https://doi.org/10.1108/MD-11-2012-0787