VAR Priors: Success or lack of a decent macroeconomic theory?
AbstractThe purpose of this paper is to demonstrate that the success of the Litterman prior in VAR forecasting is not due to the realism of the prior, but rather because the prior conveniently reduces forecast error variance in common cases of misspecification. Specifically, it is shown that the imposition of a random walk prior reduces forecast error variance in misspecifications involving (1) time-varying coefficients misspecified as constant coefficients, (2) serially correlated residuals misspecified as white noise, and (3) the inclusion of an irrelevant unit root process in VAR.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by EconWPA in its series Econometrics with number 9601002.
Length: 18 pages
Date of creation: 22 Jan 1996
Date of revision:
Note: Type of Document - word for windows 2.0; prepared on IBM PC ; to print on HP/Epson; pages: 18 ; figures: none. Word for Windows document submitted by ftp
Contact details of provider:
Web page: http://184.108.40.206
BVAR; Forecasting performance; Litterman prior; Misspecification; Random-walk prior; VAR;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
- Thomas Doan & Robert B. Litterman & Christopher A. Sims, 1983.
"Forecasting and Conditional Projection Using Realistic Prior Distributions,"
NBER Working Papers
1202, National Bureau of Economic Research, Inc.
- Thomas Doan & Robert B. Litterman & Christopher A. Sims, 1986. "Forecasting and conditional projection using realistic prior distribution," Staff Report 93, Federal Reserve Bank of Minneapolis.
- Fair, Ray C, 1979.
"An Analysis of the Accuracy of Four Macroeconometric Models,"
Journal of Political Economy,
University of Chicago Press, vol. 87(4), pages 701-18, August.
- Ray C. Fair, 1978. "An Analysis of the Accuracy of Four Macroeconometric Models," Cowles Foundation Discussion Papers 492, Cowles Foundation for Research in Economics, Yale University.
- Robert B. Litterman, 1979. "Techniques of forecasting using vector autoregressions," Working Papers 115, Federal Reserve Bank of Minneapolis.
- Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
- Christopher A. Sims, 1986. "Are forecasting models usable for policy analysis?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-16.
- Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
- Litterman, Robert B, 1986.
"Forecasting with Bayesian Vector Autoregressions-Five Years of Experience,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 4(1), pages 25-38, January.
- Robert B. Litterman, 1985. "Forecasting with Bayesian vector autoregressions five years of experience," Working Papers 274, Federal Reserve Bank of Minneapolis.
- Robert B. Litterman, 1984. "Specifying vector autoregressions for macroeconomic forecasting," Staff Report 92, Federal Reserve Bank of Minneapolis.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA).
If references are entirely missing, you can add them using this form.