Forecasting and Estimating Multiple Change-Point Models with an Unknown Number of Change Points

35 Pages Posted: 10 Dec 2004

See all articles by Simon Potter

Simon Potter

Peter G. Peterson Institute for International Economics

Gary Koop

University of Leicester - Department of Economics

Date Written: December 2004

Abstract

This paper develops a new approach to change-point modeling that allows for an unknown number of change points in the observed sample. Our model assumes that regime durations have a Poisson distribution. The model approximately nests the two most common approaches: the time-varying parameter model with a change point every period and the change-point model with a small number of regimes. We focus on the construction of reasonable hierarchical priors both for regime durations and for the parameters that characterize each regime. A Markov Chain Monte Carlo posterior sampler is constructed to estimate a change-point model for conditional means and variances. We find that our techniques work well in an empirical exercise involving U.S. inflation and GDP growth. Empirical results suggest that the number of change points is larger than previously estimated in these series and the implied model is similar to a time-varying parameter model with stochastic volatility.

Keywords: Bayesian, structural breaks, Markov Chain Monte Carlo, hierarchical prior

JEL Classification: C11, C22, E17

Suggested Citation

Potter, Simon and Koop, Gary M., Forecasting and Estimating Multiple Change-Point Models with an Unknown Number of Change Points (December 2004). Available at SSRN: https://ssrn.com/abstract=628561 or http://dx.doi.org/10.2139/ssrn.628561

Simon Potter (Contact Author)

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

Gary M. Koop

University of Leicester - Department of Economics ( email )

University Road
Leicester LE1 7RH
United Kingdom

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