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Model uncertainty in Panel Vector Autoregressive models

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  • Koop, Gary
  • Korobilis, Dimitris

Abstract

We develop methods for Bayesian model averaging (BMA) or selection (BMS) in Panel Vector Autoregressions (PVARs). Our approach allows us to select between or average over all possible combinations of restricted PVARs where the restrictions involve interdependencies between and heterogeneities across cross-sectional units. The resulting BMA framework can find a parsimonious PVAR specification, thus dealing with overparameterization concerns. We use these methods in an application involving the euro area sovereign debt crisis and show that our methods perform better than alternatives. Our findings contradict a simple view of the sovereign debt crisis which divides the euro zone into groups of core and peripheral countries and worries about financial contagion within the latter group.

Suggested Citation

  • Koop, Gary & Korobilis, Dimitris, 2016. "Model uncertainty in Panel Vector Autoregressive models," European Economic Review, Elsevier, vol. 81(C), pages 115-131.
  • Handle: RePEc:eee:eecrev:v:81:y:2016:i:c:p:115-131
    DOI: 10.1016/j.euroecorev.2015.09.006
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    References listed on IDEAS

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    1. Gary M. Koop, 2013. "Forecasting with Medium and Large Bayesian VARS," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 28(2), pages 177-203, March.
    2. De Santis, Roberto A., 2012. "The Euro area sovereign debt crisis: safe haven, credit rating agencies and the spread of the fever from Greece, Ireland and Portugal," Working Paper Series 1419, European Central Bank.
    3. Marta Bańbura, 2008. "Large Bayesian VARs," 2008 Meeting Papers 334, Society for Economic Dynamics.
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    9. Canova, Fabio & Ciccarelli, Matteo, 2013. "Panel Vector Autoregressive Models: A Survey," CEPR Discussion Papers 9380, C.E.P.R. Discussion Papers.
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    Citations

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    Cited by:

    1. Gary Koop & Dimitris Korobilis, 2015. "Forecasting With High Dimensional Panel VARs," Working Papers 2015_25, Business School - Economics, University of Glasgow.
    2. Joshua C.C. Chan & Eric Eisenstat & Chenghan Hou & Gary Koop, 2018. "Composite Likelihood Methods for Large Bayesian VARs with Stochastic Volatility," Working Paper Series 44, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
    3. Florian Huber, 2018. "Dealing with cross-country heterogeneity in panel VARs using finite mixture models," Papers 1804.01554, arXiv.org.
    4. Till Weigt & Bernd Wilfling, 2018. "An approach to increasing forecast-combination accuracy through VAR error modeling," CQE Working Papers 6818, Center for Quantitative Economics (CQE), University of Muenster.
    5. repec:eee:quaeco:v:65:y:2017:i:c:p:50-60 is not listed on IDEAS
    6. Schnücker, Annika, 2016. "Restrictions Search for Panel VARs," Annual Conference 2016 (Augsburg): Demographic Change 145566, Verein für Socialpolitik / German Economic Association.
    7. repec:eee:reveco:v:54:y:2018:i:c:p:123-142 is not listed on IDEAS
    8. Annika Schnücker, 2016. "Restrictions Search for Panel VARs," Discussion Papers of DIW Berlin 1612, DIW Berlin, German Institute for Economic Research.
    9. Korobilis, Dimitris, 2016. "Prior selection for panel vector autoregressions," Computational Statistics & Data Analysis, Elsevier, vol. 101(C), pages 110-120.
    10. Lubos Komarek & Kristyna Ters & Jorg Urban, 2016. "Intraday Dynamics of Euro Area Sovereign Credit Risk Contagion," Working Papers 2016/04, Czech National Bank, Research Department.
    11. repec:wly:japmet:v:31:y:2016:i:7:p:1371-1391 is not listed on IDEAS
    12. Michelle, Gilmartin, 2016. "A note on the identification and transmission of energy demand and supply shocks," MPRA Paper 76186, University Library of Munich, Germany.
    13. Christou, Christina & Cunado, Juncal & Gupta, Rangan & Hassapis, Christis, 2017. "Economic policy uncertainty and stock market returns in PacificRim countries: Evidence based on a Bayesian panel VAR model," Journal of Multinational Financial Management, Elsevier, vol. 40(C), pages 92-102.
    14. Annalisa Marini & Steve McCorriston, 2017. "Propagation of Commodity Market Shocks," Discussion Papers 1708, University of Exeter, Department of Economics.
    15. Steel, Mark F. J., 2017. "Model Averaging and its Use in Economics," MPRA Paper 81568, University Library of Munich, Germany.
    16. Christou, Christina & Gupta, Rangan & Hassapis, Christis, 2017. "Does economic policy uncertainty forecast real housing returns in a panel of OECD countries? A Bayesian approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 50-60.
    17. Korobilis, Dimitris, 2015. "Prior selection for panel vector autoregressions," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2015-73, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

    More about this item

    Keywords

    Bayesian model averaging; Stochastic search variable selection; Financial contagion; Sovereign debt crisis;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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