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A state‐dependent linear recurrent formula with application to time series with structural breaks

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  • Donya Rahmani
  • Damien Fay

Abstract

An underlying assumption in Multivariate Singular Spectrum Analysis (MSSA) is that the time series are governed by a linear recurrent continuation. However, in the presence of a structural break, multiple series can be transferred from one homogeneous state to another over a comparatively short time breaking this assumption. As a consequence, forecasting performance can degrade significantly. In this paper, we propose a state‐dependent model to incorporate the movement of states in the linear recurrent formula called a State‐Dependent Multivariate SSA (SD‐MSSA) model. The proposed model is examined for its reliability in the presence of a structural break by conducting an empirical analysis covering both synthetic and real data. Comparison with standard MSSA, BVAR, VAR and VECM models shows the proposed model outperforms all three models significantly.

Suggested Citation

  • Donya Rahmani & Damien Fay, 2022. "A state‐dependent linear recurrent formula with application to time series with structural breaks," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 41(1), pages 43-63, January.
    • Handle: RePEc:wly:jforec:v:41:y:2022:i:1:p:43-63
    DOI: 10.1002/for.2778
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