A Bayesian Analysis of Unit Roots and Structural Breaks in the Level and the Error Variance of Autoregressive Models of Economic Series

Queen Mary, University of London Economics Working Paper No. 514

43 Pages Posted: 26 Jul 2004

See all articles by Loukia Meligkotsidou

Loukia Meligkotsidou

National and Kapodistrian University of Athens

Elias Tzavalis

University of London - Queen Mary - Department of Economics

Ioannis D. Vrontos

Athens University of Economics and Business

Date Written: July 2004

Abstract

In this paper, a Bayesian approach is suggested to compare unit root models with stationary autoregressive models when both the level and the error variance are subject to structural changes (known as breaks) of an unknown date. Ignoring structural breaks in the error variance may be responsible for not rejecting the unit root hypothesis, even if allowance is made in the inferential procedures for breaks in the mean. The paper utilizes analytic and Monte Carlo integration techniques for calculating the marginal likelihood of the models under consideration, in order to compute the posterior model probabilities. The performance of the method is assessed by simulation experiments. Some empirical applications of the method are conducted with the aim to investigate if it can detect structural breaks in financial series, especially with changes in the error variance.

Keywords: Bayesian inference, model comparison, autoregressive models, unit roots, structural breaks

JEL Classification: C11, C22, G10

Suggested Citation

Meligkotsidou, Loukia and Tzavalis, Elias and Vrontos, Ioannis D., A Bayesian Analysis of Unit Roots and Structural Breaks in the Level and the Error Variance of Autoregressive Models of Economic Series (July 2004). Queen Mary, University of London Economics Working Paper No. 514. Available at SSRN: https://ssrn.com/abstract=568841 or http://dx.doi.org/10.2139/ssrn.568841

Loukia Meligkotsidou

National and Kapodistrian University of Athens ( email )

5 Stadiou Strt
Athens, 12131
Greece

Elias Tzavalis

University of London - Queen Mary - Department of Economics ( email )

Mile End Road
London, E1 4NS
United Kingdom

HOME PAGE: http//www.qmw.ac.uk/~ugte184/

Ioannis D. Vrontos

Athens University of Economics and Business ( email )

76 Patission Street
Athens, 104 34
Greece

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