Parametric specifications in State Space Models (SSMs) are a source of bias in case of mismatch between modeling assumptions and reality. We propose a Bayesian semiparametric SSM that is robust to misspecified emission distributions. The Markovian nature of the latent stochastic process creates a temporal dependence and links the random probability distributions of the observations in a mixture of products of Dirichlet processes (MPDP). The model is shown to be adequate and it is applied to simulated data and to the motivating empirical problem of regime shifts in interest rates with latent state persistence.
- Bayesian semiparametric State Space Model