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A Multivariate Long-Memory Model with Structural Breaks

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  • Guglielmo Maria Caporale
  • Luis A. Gil-Alana

Abstract

This paper introduces a multivariate long-memory model with structural breaks. In the proposed framework, time series exhibit possibly fractional orders of integration which are allowed to be different in each subsample. The break date is endogenously determined using a procedure which minimises the residual sum of squares (RSS). Monte Carlo experiments show that this method for detecting breaks performs well in large samples. As an illustration, we estimate a trivariate VAR including prices, employment and GDP in both the US and Mexico. For the subsample preceding the break our findings are similar to those of earlier studies based on a standard VAR approach in both countries, in the sense that the variables exhibit integer degrees of integration. On the contrary, the series are found to be fractionally integrated after the break, with the fractional differencing parameters being higher than 1 in the case of Mexico.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2007/wp-cesifo-2007-03/cesifo1_wp1950.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1950.

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Date of creation: 2007
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Handle: RePEc:ces:ceswps:_1950

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Keywords: multivariate models; fractional integration; structural breaks;

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References

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  1. Baillie, Richard T., 1996. "Long memory processes and fractional integration in econometrics," Journal of Econometrics, Elsevier, Elsevier, vol. 73(1), pages 5-59, July.
  2. Chauvet, Marcelle & Potter, Simon, 2001. "Recent Changes in the US Business Cycle," Manchester School, University of Manchester, vol. 69(5), pages 481-508, Special I.
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  4. Guglielmo Maria Caporale & Luis A. Gil-Alana, 2004. "Non-Linearities And Fractional Integration In The Us Unemployment Rate," Economics and Finance Discussion Papers, Economics and Finance Section, School of Social Sciences, Brunel University 04-17, Economics and Finance Section, School of Social Sciences, Brunel University.
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  7. Gil-Alana, L. A. & Robinson, P. M., 1997. "Testing of unit root and other nonstationary hypotheses in macroeconomic time series," Journal of Econometrics, Elsevier, Elsevier, vol. 80(2), pages 241-268, October.
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Cited by:
  1. Ouattara, Bazoumana & Amegashie, J. Atsu & Strobl, Eric, 2009. "Moral Hazard and the Composition of Transfers: Theory with an Application to Foreign Aid," Proceedings of the German Development Economics Conference, Frankfurt a.M. 2009 24, Verein für Socialpolitik, Research Committee Development Economics.

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