Prior elicitation in multiple change-point models

Koop, Gary and Potter, Simon M. (2004) Prior elicitation in multiple change-point models. Preprint / Working Paper. University of Leicester, Leicester. (https://www.le.ac.uk/economics/research/RePEc/lec/...)

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Abstract

This paper discusses Bayesian inference in change-point models. Existing approaches involve placing a (possibly hierarchical) prior over a known number of change-points. We show how two popular priors have some potentially undesirable properties (e.g. allocating excessive prior weight to change-points near the end of the sample) and discuss how these properties relate to imposing a fixed number of changepoints in-sample. We develop a new hierarchical approach which allows some of of change-points to occur out-of sample. We show that this prior has desirable properties and handles the case where the number of change-points is unknown. Our hierarchical approach can be shown to nest a wide variety of change-point models, from time varying parameter models to those with few (or no) breaks. Since our prior is hierarchical, data-based learning about the parameter which controls this variety occurs.

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