A multivariate long-memory model with structural breaks

Abstract

This paper introduces a multivariate long-memory model with structural breaks. In the proposed framework, the time series exhibits possibly fractional orders of integration which are allowed to be different in each subsample. The break date is endogenously determined using a procedure that minimizes the residual sum of squares (RSS). Monte Carlo experiments show that this method for detecting breaks performs well in large samples. As an illustration, we estimate a trivariate VAR including prices, employment and GDP in both the US and Mexico. For the subsample preceding the break, our findings are similar to those of earlier studies based on a standard VAR approach in both the countries, such that the variables exhibit integer degrees of integration. On the contrary, the series is found to be fractionally integrated after the break, with the fractional differencing parameters being higher than one in the case of Mexico.