MODELLING REGIME SWITCHING AND STRUCTURAL BREAKS WITH AN INFINITE HIDDEN MARKOV MODEL
Article first published online: 26 JUN 2013
Copyright © 2013 John Wiley & Sons, Ltd.
Journal of Applied Econometrics
Volume 29, Issue 5, pages 825–842, August 2014
How to Cite
2014), MODELLING REGIME SWITCHING AND STRUCTURAL BREAKS WITH AN INFINITE HIDDEN MARKOV MODEL, Journal of Applied Econometrics, 29, pages 825–842, doi: 10.1002/jae.2337(
- Issue published online: 29 JUL 2014
- Article first published online: 26 JUN 2013
- Manuscript Revised: 26 MAR 2013
- Manuscript Received: 15 AUG 2011
This paper proposes an infinite hidden Markov model to integrate the regime switching and structural break dynamics in a unified 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. An application to US real interest rates compares the new model to existing parametric alternatives. Copyright © 2013 John Wiley & Sons, Ltd.