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Learning, Forecasting and Structural Breaks

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  • John M Maheu
  • Stephen Gordon

Abstract

We provide a general methodology for forecasting in the presence of structural breaks induced by unpredictable changes to model parameters. Bayesian methods of learning and model comparison are used to derive a predictive density that takes into account the possibility that a break will occur before the next observation. Estimates for the posterior distribution of the most recent break are generated as a by-product of our procedure. We discuss the importance of using priors that accurately reflect the econometrician's opinions as to what constitutes a plausible forecast. Several applications to macroeconomic time-series data demonstrate the usefulness of our procedure.

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Bibliographic Info

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-284.

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Length: 42 pages
Date of creation: 30 Mar 2007
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Handle: RePEc:tor:tecipa:tecipa-284

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Keywords: Bayesian Model Averaging; Markov Chain Monte Carlo; Real GDP Growth; Phillip's Curve;

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  2. Giorgio E. Primiceri, 2005. "Time Varying Structural Vector Autoregressions and Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 821-852.
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  7. Gary Koop & Simon M. Potter, 2001. "Are apparent findings of nonlinearity due to structural instability in economic time series?," Econometrics Journal, Royal Economic Society, Royal Economic Society, vol. 4(1), pages 38.
  8. Chang-Jin Kim & Charles Nelson & Jeremy M. Piger, 2003. "The less volatile U.S. economy: a Bayesian investigation of timing, breadth, and potential explanations," Working Papers, Federal Reserve Bank of St. Louis 2001-016, Federal Reserve Bank of St. Louis.
  9. M. Hashem Pesaran & Davide Pettenuzzo & Allan Timmermann, 2006. "Forecasting Time Series Subject to Multiple Structural Breaks," Review of Economic Studies, Oxford University Press, vol. 73(4), pages 1057-1084.
  10. Andrews, Donald W. K. & Lee, Inpyo & Ploberger, Werner, 1996. "Optimal changepoint tests for normal linear regression," Journal of Econometrics, Elsevier, Elsevier, vol. 70(1), pages 9-38, January.
  11. Eric Ghysels & Alain Guay & Alastair Hall, 1995. "Predictive Tests for Structural Change with Unknown Breakpoint," CIRANO Working Papers, CIRANO 95s-20, CIRANO.
  12. Ghysels, Eric & Hall, Alastair, 1990. "A Test for Structural Stability of Euler Conditions Parameters Estimated via the Generalized Method of Moments Estimator," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(2), pages 355-64, May.
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  14. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, Econometric Society, vol. 61(4), pages 821-56, July.
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  16. Dufour, J.M. & Ghysels, E. & Hall, A., 1992. "Generalized Predictive Tests and Structural Change Analysis in Econometrics," Cahiers de recherche, Centre interuniversitaire de recherche en économie quantitative, CIREQ 9223, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  17. Gary Koop & Simon M. Potter, 2007. "Estimation and Forecasting in Models with Multiple Breaks," Review of Economic Studies, Oxford University Press, vol. 74(3), pages 763-789.
  18. Giordani, Paolo & Kohn, Robert, 2006. "Efficient Bayesian Inference for Multiple Change-Point and Mixture Innovation Models," Working Paper Series 196, Sveriges Riksbank (Central Bank of Sweden).
  19. Pesaran, M. Hashem & Timmermann, Allan, 2007. "Selection of estimation window in the presence of breaks," Journal of Econometrics, Elsevier, Elsevier, vol. 137(1), pages 134-161, March.
  20. John F. Geweke, 1994. "Bayesian comparison of econometric models," Working Papers, Federal Reserve Bank of Minneapolis 532, Federal Reserve Bank of Minneapolis.
  21. James H. Stock & Mark W. Watson, 1994. "Evidence on structural instability in macroeconomic times series relations," Working Paper Series, Macroeconomic Issues, Federal Reserve Bank of Chicago 94-13, Federal Reserve Bank of Chicago.
  22. Chib, Siddhartha, 1998. "Estimation and comparison of multiple change-point models," Journal of Econometrics, Elsevier, Elsevier, vol. 86(2), pages 221-241, June.
  23. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, Econometric Society, vol. 57(2), pages 357-84, March.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Economic growth and convergence
    by Stephen Gordon in Worthwhile Canadian Initiative on 2009-12-24 11:00:00
  2. Economic growth and convergence
    by Stephen in Worthwhile Canadian Initiative on 2006-03-26 01:24:17
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