AN ECONOMETRIC CHARACTERIZATION OF BUSINESS CYCLE DYNAMICS WITH FACTOR STRUCTURE AND REGIME SWITCHING * Marcelle Chauvet 1 Department of Economics University of California, Riverside 1150 University Avenue Riverside, CA 92521-0247 A dynamic factor model with regime switching is proposed as an empirical characterization of business cycles. The approach integrates the idea of comovements among macroeconomic variables and asymmetries of business cycle expansions and contractions. The first is captured with an unobservable dynamic factor and the second by allowing the factor to switch regimes. The model is estimated by maximizing its likelihood function and the empirical results indicate that the combination of these two features leads to a successful representation of the data relative to extant literature. This holds for within and out-of-sample and for both revised and real time data. Running Head: Business Cycle Dynamics KEY WORDS: Asymmetries, Business cycles, Comovements, Dynamic factor model, Kalman filter, Markov switching. JEL Classification: C32, C50, E32 * Manuscript submitted in January 1996. 1 This paper was written with financial support from CNPq - Brazilian Council for Scientific and Technological Research. This material is based on my doctoral dissertation from the University of Pennsylvania. I am grateful to my advisor Frank Diebold for his invaluable advice during all stages of this research. I also thank James Hamilton for helpful suggestions. The author bears full responsibility for any errors. International Economic Review, Vol. 39, No. 4, 969-96, 1998.