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Forecasting Time Series Subject to Multiple Structural Breaks

  • M. Hashem Pesaran
  • Davide Pettenuzzo
  • Allan Timmermann

This paper provides a new approach to forecasting time series that are subject to discrete structural breaks. We propose a Bayesian estimation and prediction procedure that allows for the possibility of new breaks occurring over the forecast horizon, taking account of the size and duration of past breaks (if any) by means of a hierarchical hidden Markov chain model. Predictions are formed by integrating over the parameters from the meta-distribution that characterizes the stochastic break-point process. In an application to U.S. Treasury bill rates, we find that the method leads to better out-of-sample forecasts than a range of alternative methods. Copyright 2006, Wiley-Blackwell.

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File URL: http://hdl.handle.net/10.1111/j.1467-937X.2006.00408.x
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Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 73 (2006)
Issue (Month): 4 ()
Pages: 1057-1084

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Handle: RePEc:oup:restud:v:73:y:2006:i:4:p:1057-1084
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  1. Allan Timmermann & M. Hashem Pesaran, 2002. "Market Timing and Return Prediction under Model Instability," FMG Discussion Papers dp412, Financial Markets Group.
  2. Gray, Stephen F., 1996. "Modeling the conditional distribution of interest rates as a regime-switching process," Journal of Financial Economics, Elsevier, vol. 42(1), pages 27-62, September.
  3. Pesaran, M Hashem & Timmermann, Allan G, 2004. "Small Sample Properties of Forecasts From Autoregressive Models Under Structural Breaks," CEPR Discussion Papers 4401, C.E.P.R. Discussion Papers.
  4. Garcia, R. & Perron, P., 1994. "An Analysis of the Real Interest rate Under Regime Shifts," Cahiers de recherche 9428, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
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  6. Garratt, Anthony & Kevin Lee & M Hashem Pesaran & Yongcheol Shin, 2002. "Forecast Uncertainties In Macroeconometric Modelling: An Application to the UK Economy," Royal Economic Society Annual Conference 2002 82, Royal Economic Society.
  7. Llubos Pástor, 2001. "The Equity Premium and Structural Breaks," Journal of Finance, American Finance Association, vol. 56(4), pages 1207-1239, 08.
  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 2001-016, Federal Reserve Bank of St. Louis.
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  19. repec:cup:cbooks:9780521634809 is not listed on IDEAS
  20. Hamilton, James D., 1988. "Rational-expectations econometric analysis of changes in regime : An investigation of the term structure of interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 385-423.
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  23. Aiolfi, Marco & Timmermann, Allan, 2006. "Persistence in forecasting performance and conditional combination strategies," Journal of Econometrics, Elsevier, vol. 135(1-2), pages 31-53.
  24. Michael P. Clements & David F. Hendry, 2001. "Forecasting Non-Stationary Economic Time Series," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262531895, June.
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