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An Alternative Bayesian Approach to Structural Breaks in Time Series Models

Tinbergen Institute Discussion Paper 11-023/4

49 Pages Posted: 10 Feb 2011  

Sjoerd van den Hauwe

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Richard Paap

Erasmus University Rotterdam (EUR) - Department of Econometrics; Tinbergen Institute; Erasmus Research Institute of Management (ERIM)

Dick J. C. van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute; ERIM

Date Written: February 7, 2011

Abstract

We propose a new approach to deal with structural breaks in time series models. The key contribution is an alternative dynamic stochastic specification for the model parameters which describes potential breaks. After a break new parameter values are generated from a so-called baseline prior distribution. Modeling boils down to the choice of a parametric likelihood specification and a baseline prior with the proper support for the parameters. The approach accounts in a natural way for potential out-of-sample breaks where the number of breaks is stochastic. Posterior inference involves simple computations that are less demanding than existing methods. The approach is illustrated on nonlinear discrete time series models and models with restrictions on the parameter space.

Keywords: Structural breaks, Bayesian analysis, forecasting, MCMC methods, nonlinear time series

JEL Classification: C11, C22, C51, C53, C63

Suggested Citation

van den Hauwe, Sjoerd and Paap, Richard and van Dijk, Dick J. C., An Alternative Bayesian Approach to Structural Breaks in Time Series Models (February 7, 2011). Tinbergen Institute Discussion Paper 11-023/4. Available at SSRN: https://ssrn.com/abstract=1757737 or http://dx.doi.org/10.2139/ssrn.1757737

Sjoerd Van den Hauwe (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Richard Paap

Erasmus University Rotterdam (EUR) - Department of Econometrics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Tinbergen Institute ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Dick J.C. Van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute

P.O. Box 1738
3000 DR Rotterdam
Netherlands

ERIM ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1263 (Phone)
+31 10 4089162 (Fax)

HOME PAGE: http://people.few.eur.nl/djvandijk

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