Forecasting and Estimating Multiple Change-Point Models with an Unknown Number of Change Points

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Staff Reports

Forecasting and Estimating Multiple Change-Point Models with an Unknown Number of Change Points

December 2004 Number 196

JEL classification: C11, C22, E17

Authors: Gary M. Koop and Simon M. Potter

This paper develops a new approach to change-point modeling that allows for an unknown number of change points in the observed sample. Our model assumes that regime durations have a Poisson distribution. The model approximately nests the two most common approaches: the time-varying parameter model with a change point every period and the change-point model with a small number of regimes. We focus on the construction of reasonable hierarchical priors both for regime durations and for the parameters that characterize each regime. A Markov Chain Monte Carlo posterior sampler is constructed to estimate a change-point model for conditional means and variances. We find that our techniques work well in an empirical exercise involving U.S. inflation and GDP growth. Empirical results suggest that the number of change points is larger than previously estimated in these series and the implied model is similar to a time-varying parameter model with stochastic volatility.

Available only in PDF PDF

35 pages / 542 kb

For a published version of this report, see Gary Koop and Simon M. Potter, "Estimation and Forecasting in Models with Multiple Breaks," Review of Economic Studies 74, no. 3 (July 2007): 763-89.

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