Examining the dynamics of the Turkish manufacturing industry: A hidden Markov model approach

Abstract

The industrial sector, especially the manufacturing industry, has great importance considering its connection with other industries for emerging market economies. In this context, the industrial sector plays a major role when analyzing the economic structure and providing a basis for forward-looking economic policies. This study utilizes dynamic nonlinear concepts from statistical physics that are widely employed in the econophysics methodology to identify and explicitly investigate the asymmetric dynamics of the Turkish manufacturing industry by employing regime switching models that are based on probabilistic calculations. The paper reveals the nonlinear characteristics of the manufacturing industry. The results determine the regime switching parameter estimates, identify the regime dependent heteroskedasticity, provide the smoothed probabilities along with the transition probability estimates, and identify regime classifications for each of the states defined in the study.