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Bayesian forecasting with highly correlated predictors

  • Korobilis, Dimitris

This paper considers Bayesian variable selection in regressions with a large number of possibly highly correlated macroeconomic predictors. I show that acknowledging the correlation structure in the predictors can improve forecasts over existing popular Bayesian variable selection algorithms.

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File URL: http://www.sciencedirect.com/science/article/pii/S0165176512005460
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Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 118 (2013)
Issue (Month): 1 ()
Pages: 148-150

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Handle: RePEc:eee:ecolet:v:118:y:2013:i:1:p:148-150
Contact details of provider: Web page: http://www.elsevier.com/locate/ecolet

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  1. Carmen Fernandez & Eduardo Ley & Mark F J Steel, 1998. "Benchmark priors for Bayesian model averaging," ESE Discussion Papers 26, Edinburgh School of Economics, University of Edinburgh.
  2. James H. Stock & Mark W. Watson, 1999. "Forecasting Inflation," NBER Working Papers 7023, National Bureau of Economic Research, Inc.
  3. Korobilis, Dimitris, 2009. "VAR forecasting using Bayesian variable selection," MPRA Paper 21124, University Library of Munich, Germany.
  4. Gary Koop & Simon Potter, 2004. "Forecasting in dynamic factor models using Bayesian model averaging," Econometrics Journal, Royal Economic Society, vol. 7(2), pages 550-565, December.
  5. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 147-62, April.
  6. Gary Koop & Dimitris Korobilis, 2009. "Forecasting Inflation Using Dynamic Model Averaging," Working Paper Series 34_09, The Rimini Centre for Economic Analysis, revised Jan 2009.
  7. K. J. Martijn Cremers, 2002. "Stock Return Predictability: A Bayesian Model Selection Perspective," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1223-1249.
  8. Jonathan H. Wright, 2003. "Bayesian Model Averaging and exchange rate forecasts," International Finance Discussion Papers 779, Board of Governors of the Federal Reserve System (U.S.).
  9. George, Edward I. & Sun, Dongchu & Ni, Shawn, 2008. "Bayesian stochastic search for VAR model restrictions," Journal of Econometrics, Elsevier, vol. 142(1), pages 553-580, January.
  10. Dunson, David B. & Herring, Amy H. & Engel, Stephanie M., 2008. "Bayesian Selection and Clustering of Polymorphisms in Functionally Related Genes," Journal of the American Statistical Association, American Statistical Association, vol. 103, pages 534-546, June.
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