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Removing the effect from structural breaks

Cross Validated Asked by Kiril E. Proykov on January 25, 2021

I wanted to do a sanity check.

I want to remove the effect of structural breaks on my series.

Therefore, I create a dummy with 1s for the period of structural change and 0s for the rest. (There might be several periods). Let’s call it D

I then regress it on yt = b0 + b1D + ytStar, where ytStar is the series with no structural break effect.

Do you see any issues with that?

One Answer

I do see possible flaws with your suggested approach as my answer is that you should consider using ARMAX model which can incorporate X's and their lags , ARIMA and pulses, level shifts,seasonal pulses and time trends.

Answered by IrishStat on January 25, 2021

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