Bayesian model selection with posterior probabilities and no subjective prior information is generally not possible due to the Bayes factors being ill-defined. Using careful consideration of the parameter of interest in cointegration analysis and a respecifcation of the triangular model of Phillips (1991), this paper presents an approach that allows for Bayesian comparison of models of cointegration with ‘ignorance’ priors. Using the concept of Stiefel and Grassman manifolds, diffuse priors are specified on dimension and direction of the cointegrating space. The approach is illustrated using a simple term structure of interest rates model.
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Paper provided by Centre for Economic Research, Keele University in its series Keele Economics Research Papers with number
KERP 2004/01.
Length: 19 pages Date of creation: Jan 2004 Date of revision: Publication status: Published in Oxford Bulletin of Economics and Statistics, Volume 65, Supplement 1, December 2003, pp. 863-876. [ doi:10.1046/j.0305-9049.2003.00095.x ] Handle: RePEc:kee:kerpuk:2004/01
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Find related papers by JEL classification: C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Bayesian Analysis C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
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