Quandt 1958 1972
Richard E. Quandt’s two switching-regression papers are the historical headwaters of the regime-switching family. “The Estimation of the Parameters of a Linear Regression System Obeying Two Separate Regimes” (Journal of the American Statistical Association 53(284), 1958, 873-880) posed the original problem: when a process obeys one linear regression up to some unknown date and a different one afterwards, “it is necessary first to estimate the position of the point in time at which the switch from one regime to the other occurred”, and Quandt proposed a maximum-likelihood procedure “based upon a direct examination of the likelihood function”. “A New Approach to Estimating Switching Regressions” (JASA 67(338), 1972, 306-310) generalised this, and the switching-regression apparatus was subsequently applied to market-disequilibrium problems where supply and demand schedules cannot both be observed.
These papers introduced the time-varying-parameter idea — a regression whose coefficients differ across regimes — but the regime mechanism was a deterministic or independently drawn switch, not yet a stochastic process with memory. Kim, Piger and Startz (2008) place Quandt at the start of the lineage: “regime-switching regressions … date to at least Quandt (1958)“. The decisive next step was Goldfeld and Quandt 1973, which replaced the independent switch with a latent first-order Markov chain (giving the state serial persistence), after which Hamilton 1989 extended the Markov-switching model to autoregressive, serially dependent data. Hamilton’s Palgrave survey notes that Goldfeld & Quandt’s independent switching model (1972) and fixed-transition-probability Markov model (1973) are distinct points on this path, with Quandt (1972) corresponding to the time-varying-transition independent-switching variant.
For this vault these are pure method papers. They are descriptive/estimation statistics: they define an estimation problem and a maximum-likelihood solution, test no trading strategy, use no out-of-sample period, and report no return, Sharpe ratio, drawdown, or hit rate. They appear here only as the documented antecedents of the Markov Regime-Switching Model — the “ancestor” notes a reader should know exist when assessing where the model class came from. They carry no profitability evidence, hence profitability_evidence_grade: inconclusive.
Quandt 1958 1972 [precedes] Goldfeld and Quandt 1973 Quandt 1958 1972 [precedes] Markov Regime-Switching Model Goldfeld and Quandt 1973 [precedes] Hamilton 1989
Connections
- Markov Regime-Switching Model — relates, source: https://s3.amazonaws.com/real.stlouisfed.org/wp/2003/2003-015.pdf
- Goldfeld and Quandt 1973 — precedes, source: https://s3.amazonaws.com/real.stlouisfed.org/wp/2003/2003-015.pdf
- Hamilton 1989 — relates, source: https://econweb.ucsd.edu/~jhamilto/palgrav1.pdf
Sources
- Quandt, R.E. (1958), “The Estimation of the Parameters of a Linear Regression System Obeying Two Separate Regimes”, JASA 53(284), 873-880 — https://www.tandfonline.com/doi/abs/10.1080/01621459.1958.10501484
- Quandt, R.E. (1972), “A New Approach to Estimating Switching Regressions”, JASA 67(338), 306-310
- 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