ANALYSIS OF VECTOR AUTOREGRESSIONS IN THE PRESENCE OF SHIFTS IN MEAN

This paper considers the implications of mean shifts in a multivariate setting. It is shown that under the additive outlier type mean shift specification, the intercept in each equation of the vector autoregression (VAR) will be subject to multiple shifts when the break dates of the mean shifts to the univariate series do not coincide. Conversely, under the innovative outlier type mean shift specification, both the univariate and the multivariate time series are subject to multiple shifts when mean shifts to the innovation processes occur at different dates. We consider two procedures, the first removes the shifts series by series before forming the VAR, and the second removes intercept shifts in the VAR directly. The pros and cons of both methods are discussed.