Should I stay or should I go? Bayesian inference in the threshold time varying parameter (TTVP) model

Florian Huber, Gregor Kastner, Martin Feldkircher

Publication: Working/Discussion PaperWU Working Paper

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Abstract

We provide a flexible means of estimating time-varying parameter models in a Bayesian framework. By specifying the state innovations to be characterized trough a threshold process that is driven by the absolute size of parameter changes, our model detects at each point in time whether a given regression coefficient is constant or time-varying. Moreover, our framework accounts for model uncertainty in a data-based fashion through Bayesian shrinkage priors on the initial values of the states. In a simulation, we show that our model reliably identifies regime shifts in cases where the data generating processes display high, moderate, and low numbers of movements in the regression parameters. Finally, we illustrate the merits of our approach by means of two applications. In the first application we forecast the US equity premium and in the second application we investigate the macroeconomic effects of a US monetary policy shock.
Original languageEnglish
Place of PublicationVienna
PublisherWU Vienna University of Economics and Business
Publication statusPublished - 1 Sep 2016

Publication series

NameDepartment of Economics Working Paper Series
No.235

Bibliographical note

Earlier version

WU Working Paper Series

  • Department of Economics Working Paper Series

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