The Stability of the Financial Cycle: Insights from a Markov Switching Regression in South Africa

Round 1

Reviewer 1 Report

Comments and Suggestions for Authors

Dear Author(s),

Thank you for submitting your manuscript. After careful review, I am pleased to inform you that the manuscript demonstrates strong potential and requires only minor revisions to enhance its clarity and overall quality. Below are my comments and suggestions:

Suggestions for Improvement:

Methods:

While the methodology is robust, additional explanation of the MSAR model's assumptions and rationale for selecting filtering techniques (e.g., HP filter) would improve clarity.

Figures and Captions:

Enhance the readability of figures (e.g., Figures 2 and 3) by providing more detailed captions and improving labeling.

Policy Implications:

Consider expanding the discussion of policy recommendations to provide more actionable insights specific to South Africa’s financial and economic context.

Conclusion:

Your manuscript is well-prepared and contributes significantly to the literature. Addressing the minor points above will further strengthen the paper. I look forward to seeing the revised version.

Kind regards.

Author Response

Please see the attachment. 

Author Response File: Author Response.pdf

Reviewer 2 Report

Comments and Suggestions for Authors

            The paper makes a significant contribution to understanding the financial cycle dynamics in South Africa by constructing a measure for assessing the stability of the financial cycle (FCVIX) in South Africa and identifying the key drivers of its fluctuations, particularly through the application of the Markov Switching Autoregression (MSAR).

Below I provide some comments/questions to improve the quality of the paper.

1. The rationale for choosing the DCC model over other time-varying correlation models (e.g., BEKK or Copula-GARCH) should be clarified. Was the choice based on better fit, interpretability, or computational efficiency? Similarly, were any robustness checks conducted with alternative models (e.g., Threshold AutoRegressive [TAR] or Smooth Transition AutoRegressive [STAR]) to confirm the suitability of the MSAR framework?

2. Did the study test for multicollinearity or endogeneity among these explanatory variables? If so, how was this addressed in the model estimation?

3. In the MSAR model, the author should provide more detail on how the number of regimes (two in this case) was determined. Was it based on theoretical justification, empirical testing (e.g., Bayesian Information Criterion [BIC]), or practical considerations?

4. What diagnostic tests were performed to evaluate the goodness-of-fit and adequacy of the MSAR and DCC models? Were residuals tested for autocorrelation or heteroskedasticity?

Author Response

Please see attachment. 

Author Response File: Author Response.pdf

Reviewer 3 Report

Comments and Suggestions for Authors

1. Abstract is well written with clearly defined problem

2. Check spelling mistakes. Under introduction, check and rewrite the statement on A stable financial cycle ensures.....

3. Choice of techniques for analyzing data should be properly discussed and duly justified

4. Discussion of results should be improved. It is recommended that results are compared to previous results in the literature

Author Response

Please see the attachment. 

Author Response File: Author Response.pdf