Markov switching model

📈 Economics By CampusDown Wiki Editorial Team Last updated October 23, 2026

A Markov switching model lets parameters change across unobserved regimes that follow a Markov chain. Hamilton (1989) popularized it for business cycles.

Contents

1. Overview
2. Uses
3. Frequently asked questions
4. References

Overview

Parameters such as mean and variance depend on a hidden regime.

📌 At a glance

Key: Transition matrix
Output: Regime probabilities

Uses

Recession probabilities that track NBER dates, interest-rate regimes (Ang & Bekaert 2002), volatility states.

The data, not the researcher, date the recessions. Each period gets a probability of being in recession.

Frequently asked questions

Software?: statsmodels MarkovRegression/MarkovAutoregression; R MSwM.

References

Hamilton, J. D. (1989). A new approach to the economic analysis of nonstationary time series and the business cycle. Econometrica, 57(2), 357–384.
Kim, C.-J., & Nelson, C. R. (1999). State-Space Models with Regime Switching. MIT Press.
Hamilton, J. D. (1994). Time Series Analysis. Princeton University Press.
Ang, A., & Bekaert, G. (2002). Regime switches in interest rates. Journal of Business & Economic Statistics, 20(2), 163–182.

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This article was last updated on October 23, 2026. It is based on widely recognized original works and textbooks; when citing it in a paper, please check the original sources listed in the references.