Goldfeld and Quandt 1973
Stephen M. Goldfeld and Richard E. Quandt, “A Markov Model for Switching Regressions” (Journal of Econometrics 1(1), 1973, 3-16). The paper holds a small place in publishing history — it was the first article in the first issue of the Journal of Econometrics, founded in 1973 — and a large one in the regime-switching lineage. It introduced the Markov-switching regression: a regression whose regime is selected not by an observed threshold variable but by a latent, serially dependent first-order Markov chain with fixed transition probabilities. Replacing independent (i.i.d.) regime draws with a Markov chain meant the model’s unobserved state had persistence, so the data could exhibit runs of one regime followed by runs of another.
Hamilton’s own survey (Macroeconomic Regimes and Regime Shifts; Palgrave entry) credits this paper as the origin point: “Markov-switching regressions were introduced in econometrics by Goldfeld and Quandt (1973)“. Kim, Piger and Startz (2008) describe the contribution more precisely — “Goldfeld and Quandt (1973) introduced a particularly useful version of these models, referred to in the following as a Markov-switching model, in which the latent state variable controlling regime shifts follows a Markov-chain, and is thus serially dependent” — and they classify it as the fixed transition probability Markov-switching model, distinguishing it from Goldfeld & Quandt’s 1972 independent-switching model and from later time-varying-transition variants. Goldfeld & Quandt 1973 thus bridges Quandt’s earlier static switching regressions (Quandt 1958 1972) and Hamilton’s autoregressive formulation (Hamilton 1989).
The one structural piece Goldfeld & Quandt 1973 did not solve was estimation with dependent data. Their model handled cross-sectional or independent observations; Hamilton’s 1989 advance was to embed the Markov state inside an autoregression and to compute the inference recursively. The lineage is therefore: Quandt (1958, 1972) → Goldfeld & Quandt (1972, 1973) → Hamilton (1989), with each step adding either the Markov mechanism or the ability to handle serially dependent data.
For this vault’s purpose the paper is a foundational method paper, not evidence about trading. It is descriptive/estimation econometrics: it proposes a model class and an estimation approach, tests no trading strategy, uses no held-out period, and reports no return, Sharpe ratio, drawdown, or hit rate. It supplies a building block of the Markov Regime-Switching Model but contributes no profitability evidence in either direction — hence profitability_evidence_grade: inconclusive.
Goldfeld and Quandt 1973 [defines] Markov Regime-Switching Model Quandt 1958 1972 [precedes] Goldfeld and Quandt 1973 Goldfeld and Quandt 1973 [precedes] Hamilton 1989
Connections
- Markov Regime-Switching Model — proposes_model, source: https://www.sciencedirect.com/science/article/abs/pii/030440767390002X
- Hamilton 1989 — precedes, source: https://s3.amazonaws.com/real.stlouisfed.org/wp/2003/2003-015.pdf
- Quandt 1958 1972 — relates, source: https://s3.amazonaws.com/real.stlouisfed.org/wp/2003/2003-015.pdf
- Macroeconomic Regimes and Regime Shifts — relates, source: https://econweb.ucsd.edu/~jhamilto/palgrav1.pdf
Sources
- Goldfeld, S.M. & Quandt, R.E. (1973), “A Markov Model for Switching Regressions”, Journal of Econometrics 1(1), 3-16 — https://www.sciencedirect.com/science/article/abs/pii/030440767390002X
- Kim, Piger & Startz (2003), “Estimation of Markov Regime-Switching Regression Models with Endogenous Switching”, FRB St. Louis WP 2003-015 — https://s3.amazonaws.com/real.stlouisfed.org/wp/2003/2003-015.pdf
- Hamilton, J.D. (2005), “Regime-Switching Models”, Palgrave Dictionary of Economics — https://econweb.ucsd.edu/~jhamilto/palgrav1.pdf