Abstract
Change-point (CP) processes are one flexible approach to model long time series. We propose a method to uncover which model parameters truly vary when a CP is detected. Given a set of breakpoints, we use a penalized likelihood approach to select the best set of parameters that changes over time and we prove that the penalty function leads to a consistent selection of the true model. Estimation is carried out via the deterministic annealing expectation-maximization algorithm. Our method accounts for model selection uncertainty and associates a probability to all the possible time-varying parameter specifications. Monte Carlo simulations highlight that the method works well for many time series models including heteroskedastic processes. For a sample of fourteen hedge fund (HF) strategies, using an asset-based style pricing model, we shed light on the promising ability of our method to detect the time-varying dynamics of risk exposures as well as to forecast HF returns.
Original language | English |
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Pages (from-to) | 762-805 |
Number of pages | 44 |
Journal | Journal of Financial Econometrics |
Volume | 20 |
Issue number | 4 |
DOIs | |
Publication status | Published - 2022 |
Keywords
- C11
- C12
- C22
- C32
- C52
- C53
- change-point
- Hedge funds
- model selection
- structural change
- time-varying parameter