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Forecasting and estimating multiple change-point models with an unknown number of change points

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Abstract

This paper develops a new approach to change-point modeling that allows for an unknown number of change points in the observed sample. Our model assumes that regime durations have a Poisson distribution. The model approximately nests the two most common approaches: the time-varying parameter model with a change point every period and the change-point model with a small number of regimes. We focus on the construction of reasonable hierarchical priors both for regime durations and for the parameters that characterize each regime. A Markov Chain Monte Carlo posterior sampler is constructed to estimate a change-point model for conditional means and variances. We find that our techniques work well in an empirical exercise involving U.S. inflation and GDP growth. Empirical results suggest that the number of change points is larger than previously estimated in these series and the implied model is similar to a time-varying parameter model with stochastic volatility.

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  • Gary Koop & Simon M. Potter, 2004. "Forecasting and estimating multiple change-point models with an unknown number of change points," Staff Reports 196, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:196
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    18. Gary Koop & Simon M. Potter, 2009. "Prior Elicitation In Multiple Change-Point Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(3), pages 751-772, August.
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    Cited by:

    1. Hashem Pesaran & Davide Pettenuzzo & Allan Timmermann, 2007. "Learning, Structural Instability, and Present Value Calculations," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 253-288.
    2. Gary Koop & Simon M. Potter, 2009. "Prior Elicitation In Multiple Change-Point Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(3), pages 751-772, August.
    3. John Geweke & Joel Horowitz & M. Hashem Pesaran, 2006. "Econometrics: A Bird’s Eye View," CESifo Working Paper Series 1870, CESifo.
    4. Todd E. Clark & Michael W. McCracken, 2010. "Averaging forecasts from VARs with uncertain instabilities," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(1), pages 5-29, January.
    5. Giordani, Paolo & Kohn, Robert, 2008. "Efficient Bayesian Inference for Multiple Change-Point and Mixture Innovation Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 26, pages 66-77, January.
    6. Petros Dellaportas & David G. T. Denison & Chris Holmes, 2007. "Flexible Threshold Models for Modelling Interest Rate Volatility," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 419-437.
    7. Vosseler, Alexander, 2016. "Bayesian model selection for unit root testing with multiple structural breaks," Computational Statistics & Data Analysis, Elsevier, vol. 100(C), pages 616-630.
    8. Ravazzolo, F. & van Dijk, D.J.C. & Paap, R. & Franses, Ph.H.B.F., 2006. "Bayesian Model Averaging in the Presence of Structural Breaks," Econometric Institute Research Papers EI 2006-33, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    9. Jaehee Kim & Sooyoung Cheon, 2010. "Bayesian multiple change-point estimation with annealing stochastic approximation Monte Carlo," Computational Statistics, Springer, vol. 25(2), pages 215-239, June.

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    More about this item

    Keywords

    time series analysis; Econometric models;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications

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