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Bayesian nonparametric vector autoregressive models

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  • Kalli, Maria
  • Griffin, Jim E.

Abstract

Vector autoregressive (VAR) models are the main work-horse models for macroeconomic forecasting, and provide a framework for the analysis of complex dynamics that are present between macroeconomic variables. Whether a classical or a Bayesian approach is adopted, most VAR models are linear with Gaussian innovations. This can limit the model’s ability to explain the relationships in macroeconomic series. We propose a nonparametric VAR model that allows for nonlinearity in the conditional mean, heteroscedasticity in the conditional variance, and non-Gaussian innovations. Our approach differs from that of previous studies by modelling the stationary and transition densities using Bayesian nonparametric methods. Our Bayesian nonparametric VAR (BayesNP-VAR) model is applied to US and UK macroeconomic time series, and compared to other Bayesian VAR models. We show that BayesNP-VAR is a flexible model that is able to account for nonlinear relationships as well as heteroscedasticity in the data. In terms of short-run out-of-sample forecasts, we show that BayesNP-VAR predictively outperforms competing models.

Suggested Citation

  • Kalli, Maria & Griffin, Jim E., 2018. "Bayesian nonparametric vector autoregressive models," Journal of Econometrics, Elsevier, vol. 203(2), pages 267-282.
  • Handle: RePEc:eee:econom:v:203:y:2018:i:2:p:267-282
    DOI: 10.1016/j.jeconom.2017.11.009
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    Cited by:

    1. Billio, Monica & Casarin, Roberto & Rossini, Luca, 2019. "Bayesian nonparametric sparse VAR models," Journal of Econometrics, Elsevier, vol. 212(1), pages 97-115.
    2. Legrand, Romain, 2018. "Time-Varying Vector Autoregressions: Efficient Estimation, Random Inertia and Random Mean," MPRA Paper 88925, University Library of Munich, Germany.
    3. Zahra Barzegar & Firoozeh Rivaz, 2020. "A scalable Bayesian nonparametric model for large spatio-temporal data," Computational Statistics, Springer, vol. 35(1), pages 153-173, March.
    4. Florian Huber & Luca Rossini, 2020. "Inference in Bayesian Additive Vector Autoregressive Tree Models," Papers 2006.16333, arXiv.org.
    5. Matteo Iacopini & Luca Rossini, 2019. "Bayesian nonparametric graphical models for time-varying parameters VAR," Papers 1906.02140, arXiv.org.

    More about this item

    Keywords

    Vector autoregressive models; Dirichlet process prior; Infinite mixtures; Markov chain Monte Carlo;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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