Model Selection Criteria for Segmented Time Series from a Bayesian Approach to Information Compression

The principle that the simplest model capable of describing observed phenomena should also correspond to the best description has long been a guiding rule of inference. In this paper a Bayesian approach to formally implementing this principle is employed to develop model selection criteria for detecting structural change in financial and economic time series. Model selection criteria which allow for multiple structural breaks and which seek the optimal model order and parameter choices within regimes are derived. Comparative simulations against other popular information based model selection criteria are performed. Application of the derived criteria are also made to example financial and economic time series.Complexity theory; segmentation; break points; change points; model selection; model choice.

Bayesian Target Zones

Several authors have postulated econometric models for exchange rates restricted to lie within known target zones. However, it is not uncommon to observe exchange rate data with known limits that are not fully 'credible'; that is, where some of the observations fall outside the stated range. An empirical model for exchange rates in a soft target zone where there is a controlled probability of the observed rates exceeding the stated limits is developed in this paper. A Bayesian approach is used to analyse the model, which is then demonstrated on Deutschemark-French franc and ECU-French franc exchange rate data.

Non-linear Modelling of the Australian Business Cycle using a Leading Indicator

This paper develops a new non-linear model to analyse the business cycle by exploiting the relationship between the asymmetrical behaviour of the cycle and leading indicators. The model proposed is an innovations form of the structural model underlying simple exponential smoothing that is augmented by a latent Markov switching process. Furthermore, the probabilities that drive the Markov process vary with the growth of the leading indicator. The proposed model is used to analyse the Australian business cycle using the gross domestic product as a proxy and the industrial materials prices index as the exogenous leading indicator influencing the transition probabilities. Model parameters are estimated using a Gibbs sampling algorithm and subsequently used for forecasting purposes.Structural model; Markov switching regime; Gibbs sampling; Business cycle; Leading indicator.

Low level remote sensing: The Doppler Radar wind profiler

Mesoscale phenomena such as thunderstorm and sea breeze frontal circulations are being investigated using a 50 MHz Doppler wind profiler at the Kennedy Space Center. The profiler installation will begin October 1, 1988 and will be completed by February 17, 1989. The focus of current research and plans for next year include: examination of vertical velocities associated with local thunderstorm activity and sea breeze frontal circulations and compare the vertical velocities to conceptual mesoscale models; implementation of space-time conversion analysis techniques to blend profiler data with National Meteorological Center's model output and other wind data such as jimsphere, windsonde and rawinsonde for mesoscale analysis; development of suggestions for use of wind profiler data in mesoscale analysis and forecasting at Kennedy Space Center; and problems detection in the quality of the profiler data during this research project. Researchers will work closely with MSFC to identify and solve the data quality problems

Bayesian Estimation of a Stochastic Volatility Model Using Option and Spot Prices: Application of a Bivariate Kalman Filter

In this paper Bayesian methods are applied to a stochastic volatility model using both the prices of the asset and the prices of options written on the asset. Posterior densities for all model parameters, latent volatilities and the market price of volatility risk are produced via a hybrid Markov Chain Monte Carlo sampling algorithm. Candidate draws for the unobserved volatilities are obtained by applying the Kalman filter and smoother to a linearization of a state-space representation of the model. The method is illustrated using the Heston (1993) stochastic volatility model applied to Australian News Corporation spot and option price data. Alternative models nested in the Heston framework are ranked via Bayes Factors and via fit, predictive and hedging performance.Option Pricing; Volatility Risk; Markov Chain Monte Carlo; Nonlinear State Space Model; Kalman Filter and Smoother.