BVAR models in the context of cointegration: A Monte Carlo experiment
AbstractThe kind of prior typically employed in Bayesian vector autoregression (BVAR) analysis has aroused widespread suspicion about the ability of these models to capture long-run patterns. This paper specifies a bivariate cointegrated stochastic process and conducts a Monte Carlo experiment to assess the small sample performance of two classical and two Bayesian estimation methods commonly applied to VAR models. In addition, a proposal to introduce a new dimension to the prior information in order to allow for explicit account of long-run restrictions is suggested and evaluated in the light of the experiment. The results of the experiment show that: the Minnesota -type prior with hyperparameter search performs well, suggesting that the prevalent suspicion about the inability of this prior to capture long-run patterns is not well-grounded; the fine-tunning of the prior is crucial; and adding long-run restrictions to the prior does not provide improvements in the case analyzed.
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Bibliographic InfoPaper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 9405.
Length: 41 pages
Date of creation: 1994
Date of revision:
Bayesian vector autoregression; cointegration; Monte Carlo experiment;
Find related papers by JEL classification:
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
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- Ricardo Mourinho Félix & Luís Catela Nunes, 2003. "Forecasting Euro Area Aggregates with Bayesian VAR and VECM Models," Working Papers w200304, Banco de Portugal, Economics and Research Department.
- Sonsoles Castillo & Fernando C. Ballabriga, 2003. "BBVA-ARIES: a forecasting and simulation model for EMU," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 22(5), pages 411-426.
- Enrique M. Quilis(1), . "Modelos Bvar: Especificación, Estimación E Inferencia," Working Papers 8-02 Classification-JEL :, Instituto de Estudios Fiscales.
- Andrea Nobili, 2005. "Forecasting Output Growth And Inflation In The Euro Area: Are Financial Spreads Useful?," Temi di discussione (Economic working papers) 544, Bank of Italy, Economic Research and International Relations Area.
- Matteo Ciccarelli & Alessandro Rebucci, 2003. "Bayesian Vars," IMF Working Papers 03/102, International Monetary Fund.
- Ballabriga, Fernando & Sebastian, Miguel & Valles, Javier, 1999. "European asymmetries," Journal of International Economics, Elsevier, vol. 48(2), pages 233-253, August.
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