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Time-varying sparsity in dynamic regression models

  • Kalli, Maria
  • Griffin, Jim E.

A novel Bayesian method for inference in dynamic regression models is proposed where both the values of the regression coefficients and the importance of the variables are allowed to change over time. We focus on forecasting and so the parsimony of the model is important for good performance. A prior is developed which allows the shrinkage of the regression coefficients to suitably change over time and an efficient Markov chain Monte Carlo method for posterior inference is described. The new method is applied to two forecasting problems in econometrics: equity premium prediction and inflation forecasting. The results show that this method outperforms current competing Bayesian methods.

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Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 178 (2014)
Issue (Month): 2 ()
Pages: 779-793

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Handle: RePEc:eee:econom:v:178:y:2014:i:2:p:779-793
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconom

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  8. Ivo Welch & Amit Goyal, 2008. "A Comprehensive Look at The Empirical Performance of Equity Premium Prediction," Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1455-1508, July.
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  16. Andrew Ang & Geert Bekaert, 2001. "Stock Return Predictability: Is it There?," NBER Working Papers 8207, National Bureau of Economic Research, Inc.
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