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

Gary Koop and Simon Potter

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Abstract: Many structural break and regime-switching models have been used with macroeconomic and financial data. In this paper, we develop an extremely flexible modeling approach which can accommodate virtually any of these specifications. We build on earlier work showing the relationship between flexible functional forms and random variation in parameters. Our contribution is based around the use of priors on the time variation that is developed from considering a hypothetical reordering of the data and distance between neighboring (reordered) observations. The range of priors produced in this way can accommodate a wide variety of nonlinear time series models, including those with regime-switching and structural breaks. By allowing the amount of random variation in parameters to depend on the distance between (reordered) 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). Bayesian econometric methods for inference are developed for estimating the distance function and types of hypothetical reordering. Conditional on a hypothetical reordering and distance function, a simple reordering of the actual data allows us to estimate our models with standard state space methods by a simple adjustment to the measurement equation. We use artificial data to show the advantages of our approach, before providing two empirical illustrations involving the modeling of real GDP growth.

Keywords: C11; C22; E17; Bayesian; Structural break; Threshold autoregressive; Regime switching; State space model (search for similar items in EconPapers)
Date: 2010-09-15
Note: View the original document on HAL open archive server: https://hal.science/hal-00732535
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Citations: View citations in EconPapers (10)

Published in Econometrics, 2010, 159 (1), pp.134. ⟨10.1016/j.jeconom.2010.05.002⟩

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Journal Article: A flexible approach to parametric inference in nonlinear and time varying time series models (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00732535

DOI: 10.1016/j.jeconom.2010.05.002

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