Journal article

Sparse change-point VAR models

Arnaud Dufays, Zhuo Li, Jeroen VK Rombouts, Yong Song

JOURNAL OF APPLIED ECONOMETRICS | WILEY | Published : 2021

Abstract

Change-point (CP) VAR models face a dimensionality curse due to the proliferation of parameters that arises when new breaks are detected. We introduce the Sparse CP-VAR model which determines which parameters truly vary when a break is detected. By doing so, the number of new parameters to be estimated at each regime is drastically reduced and the break dynamics becomes easier to be interpreted. The Sparse CP-VAR model disentangles the dynamics of the mean parameters and the covariance matrix. The former uses CP dynamics with shrinkage prior distributions, while the latter is driven by an infinite hidden Markov framework. An extensive simulation study is carried out to compare our approach w..

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University of Melbourne Researchers