Marginal Likelihood Calculation for Gelfand-Dey and Chib Method

8 Pages Posted: 21 Nov 2011

See all articles by Chun Liu

Chun Liu

University of Toronto; Tsinghua University - School of Economics and Management

Date Written: November 20, 2010

Abstract

One advantage of Bayesian estimation is its solid theoretical ground on model comparison, which relies heavily upon the accurate calculation of marginal likelihood. The Gelfand-Dey (1994) and Chib (1995) methods are two popular means of calculating marginal likelihood. A trade-o® exists between these two methods. The Gelfand-Dey method is simpler and faster to conduct, while Chib method is more accurate, yet intricate. In this paper, we compare the two methods by their ability to identify structural breaks in a reduced form volatility model. Using the Markov Chain Monte Carlo method, we demonstrate that the performance of the two methods is fairly close. Since the Chib method is normally more di±cult to implement in many econometric problems, it is safe to choose Gelfand-Dey method when calculating marginal likelihood.

Keywords: model comparison, structural break, heterogeneous autoregressive model

JEL Classification: C11, C52

Suggested Citation

Liu, Chun and Liu, Chun, Marginal Likelihood Calculation for Gelfand-Dey and Chib Method (November 20, 2010). Available at SSRN: https://ssrn.com/abstract=1962418 or http://dx.doi.org/10.2139/ssrn.1962418

Chun Liu (Contact Author)

Tsinghua University - School of Economics and Management ( email )

Beijing, 100084
China

University of Toronto ( email )

Toronto, Ontario M5S 3G8
Canada

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