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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. Lubos Pastor & Robert F. Stambaugh, . "The Equity Premium and Structural Breaks," Rodney L. White Center for Financial Research Working Papers 11-00, Wharton School Rodney L. White Center for Financial Research.
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  3. Pesaran, M.H. & Timmermann, A., 2003. "Small Sample Properties of Forecasts from Autoregressive Models under Structural Breaks," Cambridge Working Papers in Economics 0331, Faculty of Economics, University of Cambridge.
  4. Garrat, A. & Lee, K. & Pesaran, M.H. & Shin, Y., 2000. "Forecast Uncertainties in Macroeconometric Modelling: An Application to the UK Economy," Cambridge Working Papers in Economics 0004, Faculty of Economics, University of Cambridge.
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  19. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
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