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.
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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
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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
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