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Forecasting Time Series with Long Memory and Level Shifts, A Bayesian Approach

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  • Silvestro Di Sanzo

    () (Department of Economics, University Of Alicante)

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    Abstract

    Recent studies have showed that it is troublesome, in practice, to distinguish between long memory and nonlinear processes. Therefore, it is of obvious interest to try to capture both features of long memory and non-linearity into a single time series model to be able to assess their relative importance. In this paper we put forward such a model, where we combine the features of long memory and Markov nonlinearity. A Markov Chain Monte Carlo algorithm is proposed to estimate the model and evaluate its forecasting performance using Bayesian predictive densities. The resulting forecasts are a significant improvement over those obtained by the linear long memory and Markov switching models.

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    File URL: http://www.unive.it/media/allegato/DIP/Economia/Working_papers/Working_papers_2007/WP_DSE_DiSanzo_03_07.pdf
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    Bibliographic Info

    Paper provided by Department of Economics, University of Venice "Ca' Foscari" in its series Working Papers with number 2007_03.

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    Length: 35
    Date of creation: 2007
    Date of revision:
    Handle: RePEc:ven:wpaper:2007_03

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    Keywords: Markov-Switching models; Bootstrap; Gibbs Sampling;

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    1. Sowell, Fallaw, 1992. "Maximum likelihood estimation of stationary univariate fractionally integrated time series models," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 165-188.
    2. Andersson, Michael K. & Eklund, Bruno & Lyhagen, Johan, 1999. "A Simple Linear Time Series Model with Misleading Nonlinear Properties," Working Paper Series in Economics and Finance 300, Stockholm School of Economics.
    3. Gourieroux, Christian & Jasiak, Joann, 2001. "Memory and infrequent breaks," Economics Letters, Elsevier, vol. 70(1), pages 29-41, January.
    4. Baillie, Richard T., 1996. "Long memory processes and fractional integration in econometrics," Journal of Econometrics, Elsevier, vol. 73(1), pages 5-59, July.
    5. Granger, Clive W. J. & Terasvirta, Timo, 1999. "A simple nonlinear time series model with misleading linear properties," Economics Letters, Elsevier, vol. 62(2), pages 161-165, February.
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