A Multivariate Long-Memory Model with Structural Breaks
Guglielmo Maria Caporale
London South Bank University; Brunel University - Brunel Business School; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
Luis A. Gil-Alana
University of Navarra - Department of Economics
CESifo Working Paper Series No. 1950
This paper introduces a multivariate long-memory model with structural breaks. In the proposed framework, time series exhibit possibly fractional orders of integration which are allowed to be different in each subsample. The break date is endogenously determined using a procedure which minimises the residual sum of squares (RSS). Monte Carlo experiments show that this method for detecting breaks performs well in large samples. As an illustration, we estimate a trivariate VAR including prices, employment and GDP in both the US and Mexico. For the subsample preceding the break our findings are similar to those of earlier studies based on a standard VAR approach in both countries, in the sense that the variables exhibit integer degrees of integration. On the contrary, the series are found to be fractionally integrated after the break, with the fractional differencing parameters being higher than 1 in the case of Mexico.
Number of Pages in PDF File: 29
Keywords: multivariate models, fractional integration, structural breaks
JEL Classification: C22working papers series
Date posted: April 18, 2007
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