Bayesian subset selection for threshold autoregressive moving-average models

Optimal subset selection among a general family of threshold autoregressive moving-average (TARMA) models is considered. The usual complexity of model/order selection is increased by capturing the uncertainty of unknown threshold levels and an unknown delay lag. The Monte Carlo method of Bayesian model averaging provides a possible way to overcome such model uncertainty. Incorporating with the idea of Bayesian model averaging, a modified stochastic search variable selection method is adapted to consider subset selection in TARMA models, by adding latent indicator variables for all potential model lags as part of the proposed Markov chain Monte Carlo sampling scheme. Metropolis–Hastings methods are employed to deal with the well-known difficulty of including moving-average terms in the model and a novel proposal mechanism is designed for this purpose. Bayesian comparison of two hyper-parameter settings is carried out via a simulation study. The results demonstrate that the modified method has favourable performance under reasonable sample size and appropriate settings of the necessary hyper-parameters. Finally, the application to four real datasets illustrates that the proposed method can provide promising and parsimonious models from more than 16 million possible subsets.