ARTICLE IN PRESS JID: CJPH [m3Gsc;May 12, 2017;18:8] Chinese Journal of Physics 000 (2017) 1–7 Contents lists available at ScienceDirect Chinese Journal of Physics journal homepage: www.elsevier.com/locate/cjph Examining the dynamics of the Turkish manufacturing industry: A hidden Markov model approach ˙ I.O. Baycan ∗ , G. Yildirim Anadolu University, Department of Economics, 26470 Eskisehir, Turkey a r t i c l e i n f o Article history: Received 29 September 2016 Revised 17 March 2017 Accepted 17 March 2017 Available online xxx Keywords: Econophysics Markov switching models Turkish Economy a b s t r a c t The industrial sector, especially the manufacturing industry, has great importance consid- ering 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 pro- viding a basis for forward-looking economic policies. This study utilizes dynamic nonlinear concepts from statistical physics that are widely employed in the econophysics methodol- ogy to identify and explicitly investigate the asymmetric dynamics of the Turkish manu- facturing 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 de- pendent heteroskedasticity, provide the smoothed probabilities along with the transition probability estimates, and identify regime classifications for each of the states defined in the study. © 2017 Published by Elsevier B.V. on behalf of The Physical Society of the Republic of China (Taiwan). 1. Introduction Economics is a complex discipline that is shaped by many interactions. These interactions create a multidimensional in- terdependence among the subjects of the system that causes important difficulties in comprehending and observing the un- derlying reasons for the economic issues. This chaotic structure requires the utilization of further instruments for a broader and deeper understanding. Classical deterministic approaches in econometrics are not adequate to carry out a more realistic analysis in accordance with this complex structure. These types of models, which simplify the complexity of the real world, exclude the effects of many underlying causalities. Therefore, the process of seeking more realistic methods for economic research has given rise to econophysics as a recent interdisciplinary field based on the nonlinear probabilistic approach by applying statistical physics methods to economic matters, particularly in studies relating to financial market instruments. There are many successful studies that explain and apply the statistical physical calculations in the concept of econophysics, as in [1–6]. This paper provides a broader investigation into the cyclical asymmetric properties of the Turkish manufactur- ing industry utilizing regime switching models based on nonlinear stochastic processes that are widely employed in the econophysics methodology. For other applications on modeling the regime switchings of time series parameters based on the Markov process, see [7–10], among others. ∗ Corresponding author. E-mail address: iobaycan@anadolu.edu.tr ( ˙ I.O. Baycan). This study is supported by Anadolu University Scientific Research Projects Commission under the grant no: 1508E582. http://dx.doi.org/10.1016/j.cjph.2017.03.020 0577-9073/© 2017 Published by Elsevier B.V. on behalf of The Physical Society of the Republic of China (Taiwan). Please cite this article as: ˙ I.O. Baycan, G. Yildirim, Examining the dynamics of the Turkish manufacturing industry: A hidden Markov model approach, Chinese Journal of Physics (2017), http://dx.doi.org/10.1016/j.cjph.2017.03.020