A Unified Approach to Nonlinearity, Structural Change, and Outliers

Econometric Institute Report EI 2005-09

37 Pages Posted: 24 Jan 2006

See all articles by Paolo Giordani

Paolo Giordani

Norwegian Business School

Robert Kohn

University of New South Wales - School of Economics and School of Banking and Finance

Dick J. C. van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute; ERIM

Date Written: March 2005

Abstract

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

Giordani, Paolo and Kohn, Robert and van Dijk, Dick J.C., A Unified Approach to Nonlinearity, Structural Change, and Outliers (March 2005). Econometric Institute Report EI 2005-09, Available at SSRN: https://ssrn.com/abstract=738865 or http://dx.doi.org/10.2139/ssrn.738865

Paolo Giordani (Contact Author)

Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Robert Kohn

University of New South Wales - School of Economics and School of Banking and Finance ( email )

Australian School of Business
Sydney NSW 2052, ACT 2600
Australia
+61 2 9385 2150 (Phone)

Dick J.C. Van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute

P.O. Box 1738
3000 DR Rotterdam
Netherlands

ERIM ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1263 (Phone)
+31 10 4089162 (Fax)

HOME PAGE: http://people.few.eur.nl/djvandijk

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