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A flexible approach to parametric inference in nonlinear and time varying time series models

Koop, G.M. and Potter, S. (2010) A flexible approach to parametric inference in nonlinear and time varying time series models. Journal of Econometrics, 159 (1). pp. 134-150. ISSN 0304-4076

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    Abstract

    Many structural break and regime-switching models have been used with macroeconomic and …nancial data. In this paper, we develop an extremely flexible parametric model which can accommodate virtually any of these speci…cations and does so in a simple way which allows for straightforward Bayesian inference. The basic idea underlying our model is that it adds two simple concepts to a standard state space framework. These ideas are ordering and distance. By ordering the data in various ways, we can accommodate a wide variety of nonlinear time series models, including those with regime-switching and structural breaks. By allowing the state equation variances to depend on the distance between observations, the parameters can evolve in a wide variety of ways, allowing for everything from models exhibiting abrupt change (e.g. threshold autoregressive models or standard structural break models) to those which allow for a gradual evolution of parameters (e.g. smooth transition autoregressive models or time varying parameter models). We show how our model will (approximately) nest virtually every popular model in the regime-switching and structural break literatures. Bayesian econometric methods for inference in this model are developed. Because we stay within a state space framework, these methods are relatively straightforward, drawing on the existing literature. We use arti…cial data to show the advantages of our approach, before providing two empirical illustrations involving the modeling of real GDP growth.

    Item type: Article
    ID code: 28119
    Notes: This is a variant record V: 7735
    Keywords: bayesian, structural break, threshold autoregressive, regime switching, space model economics, Economic Theory, History and Philosophy of Science, Economics and Econometrics, Applied Mathematics
    Subjects: Social Sciences > Economic Theory
    Department: Strathclyde Business School > Economics
    Related URLs:
    Depositing user: Miss Jenna Wright
    Date Deposited: 13 Oct 2010 16:26
    Last modified: 05 Sep 2014 13:37
    URI: http://strathprints.strath.ac.uk/id/eprint/28119

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