On Marginal Likelihood Computation in Change-Point Models

Computational Statistics and Data Analysis, 56, 3415-3429, 2012

35 Pages Posted: 9 May 2017

See all articles by Luc Bauwens

Luc Bauwens

Université catholique de Louvain

J. V. K. Rombouts

HEC Montreal; Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE); Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE); Center for Interuniversity Research and Analysis on Organization (CIRANO)

Date Written: June 30, 2010

Abstract

Change-point models are useful for modeling time series subject to structural breaks. For interpretation and forecasting, it is essential to estimate correctly the number of change points in this class of models. In Bayesian inference, the number of change points is typically chosen by the marginal likelihood criterion, computed by Chib’s method. This method requires to select a value in the parameter space at which the computation is performed. Bayesian inference for a change-point dynamic regression model and the computation of its marginal likelihood are explained. Motivated by results from three empirical illustrations, a simulation study shows that Chib’s method is robust with respect to the choice of the parameter value used in the computations, among posterior mean, mode and quartiles. However, taking into account the precision of the marginal likelihood estimator, the overall recommendation is to use the posterior mode or median. Furthermore, the performance of the Bayesian information criterion, which is based on maximum likelihood estimates, in selecting the correct model is comparable to that of the marginal likelihood.

Keywords: Bayesian inference, BIC, change-point model, structural break, marginal likelihood

JEL Classification: C11, C22, C52

Suggested Citation

Bauwens, Luc and Rombouts, Jeroen, On Marginal Likelihood Computation in Change-Point Models (June 30, 2010). Computational Statistics and Data Analysis, 56, 3415-3429, 2012, Available at SSRN: https://ssrn.com/abstract=2965535

Luc Bauwens (Contact Author)

Université catholique de Louvain ( email )

CORE
34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium
32 10 474321 (Phone)
32 10 474301 (Fax)

Jeroen Rombouts

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium

Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE) ( email )

Pavillon De Sève
Ste-Foy, Quebec G1K 7P4
Canada

Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

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Montreal H3C 3J7, Quebec
Canada

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