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Modelling Regime Switching and Structural Breaks with an Infinite Hidden Markov Model

Yong Song ()

Working Paper series from Rimini Centre for Economic Analysis

Abstract: This paper proposes an infinite hidden Markov model to integrate the regime switching and the structural break dynamics in a single, coherent Bayesian framework. Two parallel hierarchical structures, one governing the transition probabilities and another governing the parameters of the conditional data density, keep the model parsimonious and improve forecasts. This flexible approach allows for regime persistence and estimates the number of states automatically. A global identification methodology for structural changes versus regime switching is presented. An application to U.S. real interest rates compares the new model to existing parametric alternatives.

Keywords: Markov switching; structural break; Dirichlet process; infinite hidden Markov model (search for similar items in EconPapers)
JEL-codes: C11 C53 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ets
Date: 2012-06
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http://www.rcea.org/RePEc/pdf/wp28_12.pdf (application/pdf)

Related works:
Journal Article: MODELLING REGIME SWITCHING AND STRUCTURAL BREAKS WITH AN INFINITE HIDDEN MARKOV MODEL (2014) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:rim:rimwps:28_12

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