Andersson, Michael K () (Department of Business, Economics, Statistics and Informatics) Karlsson, Sune () (Department of Business, Economics, Statistics and Informatics)
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We consider forecast combination and, indirectly, model selection for VAR models when there is uncertainty about which variables to include in the model in addition to the forecast variables. The key di erence from traditional Bayesian variable selection is that we also allow for uncertainty regarding which endogenous variables to include in the model. That is, all models include the forecast variables, but may otherwise have di ering sets of endogenous variables. This is a dicult problem to tackle with a traditional Bayesian approach. Our solution is to focus on the forecasting performance for the variables of interest and we construct model weights from the predictive likelihood of the forecast variables. The procedure is evaluated in a small simulation study and found to perform competitively in applications to real world data.
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Paper provided by Örebro University, Swedish Business School in its series Working Papers with number
2007:13.
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