A Unified Approach to Nonlinearity, Structural Change, and Outliers
Econometric Institute Report EI 2005-09
37 Pages Posted: 24 Jan 2006
Date Written: March 2005
This paper demonstrates that the class of conditionally linear and Gaussian state-space models offers a general and convenient framework for simultaneously handling nonlinearity, structural change and outliers in time series. Many popular nonlinear time series models, including threshold, smooth transition and Markov-Switching models, can be written in state-space form. It is then straightforward to add components that capture parameter instability and intervention effects. We advocate a Bayesian approach to estimation and inference, using an efficient implementation of Markov Chain Monte Carlo sampling schemes for such linear dynamic mixture models. The general modelling framework and the Bayesian methodology are illustrated by means of several examples. An application to quarterly industrial production growth rates for the G7 countries demonstrates the empirical usefulness of the approach.
Keywords: State-space models, Markov-switching models, Threshold models, Bayesian inference, Business cycle asymmetry
JEL Classification: C11, C22, E32
Suggested Citation: Suggested Citation