Robust Estimation of ARMA Models with Near Root Cancellation

Timothy Cogley and Richard Startz

A chapter in Topics in Identification, Limited Dependent Variables, Partial Observability, Experimentation, and Flexible Modeling: Part A, 2019, vol. 40A, pp 133-155 from Emerald Group Publishing Limited

Abstract: Standard estimation of ARMA models in which the AR and MA roots nearly cancel, so that individual coefficients are only weakly identified, often produces inferential ranges for individual coefficients that give a spurious appearance of accuracy. We remedy this problem with a model that uses a simple mixture prior. The posterior mixing probability is derived using Bayesian methods, but we show that the method works well in both Bayesian and frequentist setups. In particular, we show that our mixture procedure weights standard results heavily when given data from a well-identified ARMA model (which does not exhibit near root cancellation) and weights heavily an uninformative inferential region when given data from a weakly-identified ARMA model (with near root cancellation). When our procedure is applied to a well-identified process the investigator gets the “usual results,” so there is no important statistical cost to using our procedure. On the other hand, when our procedure is applied to a weakly identified process, the investigator learns that the data tell us little about the parameters – and is thus protected against making spurious inferences. We recommend that mixture models be computed routinely when inference about ARMA coefficients is of interest.

Keywords: ARMA; near root cancellation; Bayesian; mixture models; weak identification; time series (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Robust Estimation of ARMA Models with Near Root Cancellation (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eme:aecozz:s0731-90532019000040a007

DOI: 10.1108/S0731-90532019000040A007

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