Sigma Point Filters for Dynamic Nonlinear Regime Switching Models

37 Pages Posted: 10 Jun 2015

Date Written: May 18, 2015

Abstract

In this paper we take three well known Sigma Point Filters, namely the Unscented Kalman Filter, the Divided Difference Filter, and the Cubature Kalman Filter, and extend them to allow for a very general class of dynamic nonlinear regime switching models. Using both a Monte Carlo study and real data, we investigate the properties of our proposed filters by using a regime switching DSGE model solved using nonlinear methods. We find that the proposed filters perform well. They are both fast and reasonably accurate, and as a result they will provide practitioners with a convenient alternative to Sequential Monte Carlo methods. We also investigate the concept of observability and its implications in the context of the nonlinear filters developed and propose some heuristics. Finally, we provide in the RISE toolbox, the codes implementing these three novel filters.

Keywords: Regime Switching, Higher-order Perturbation, Sigma Point Filters, Nonlinear DSGE estimation, Observability

Suggested Citation

Binning, Andrew and Maih, Junior, Sigma Point Filters for Dynamic Nonlinear Regime Switching Models (May 18, 2015). Norges Bank Working Paper 10 | 2015, Available at SSRN: https://ssrn.com/abstract=2616801 or http://dx.doi.org/10.2139/ssrn.2616801

Andrew Binning (Contact Author)

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

Junior Maih

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

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