Bayesian Inference about the Types of Structural Breaks When There Are Different Breaks in Many Parameters

42 Pages Posted: 27 Feb 2012 Last revised: 18 Feb 2018

See all articles by Yunjong Eo

Yunjong Eo

The University of Sydney - School of Economics

Date Written: April 1, 2012

Abstract

I propose a Bayesian approach to making an inference about complicated patterns of structural breaks in time series. Structural break models in the literature are mainly considered for a simple case in which all the parameters under the structural changes are restricted to have breaks at the same dates. Unlike the existing literature, the proposed method in this paper allows multiple parameters such as intercept, persistence, and/or residual variance to undergo mutually independent structural breaks at different dates with the different number of breaks across parameters. To estimate the complex structural break models considered in this paper, structural breaks in the multiple parameters are interpreted as regime transitions. The regime for each parameter is then indicated by a corresponding discrete latent variable which follows a first-order Markov process. A Markov-chain Monte Carlo scheme is developed to estimate and compare the complex structural break models, which are potentially non-nested, in an efficient and tractable way. I then apply this approach to postwar U.S. inflation and find strong support for an autoregressive model with two structural breaks in residual variance and no break in intercept and persistence.

Keywords: Bayesian Analysis; Structural Breaks; Multiple-Parameter Change-point; Inflation Dynamics;

JEL Classification: C11; C52

Suggested Citation

Eo, Yunjong, Bayesian Inference about the Types of Structural Breaks When There Are Different Breaks in Many Parameters (April 1, 2012). Available at SSRN: https://ssrn.com/abstract=2011825 or http://dx.doi.org/10.2139/ssrn.2011825

Yunjong Eo (Contact Author)

The University of Sydney - School of Economics ( email )

Social Sciences Building (A02)
Sydney, NSW 2006
Australia

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