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Bayesian forecasting using stochastic search variable selection in a VAR subject to breaks

  • Jochmann, Markus
  • Koop, Gary
  • Strachan, Rodney W.

This paper builds a model which has two extensions over a standard VAR. The first of these is stochastic search variable selection, which is an automatic model selection device that allows coefficients in a possibly over-parameterized VARÂ to be set to zero. The second extension allows for an unknown number of structural breaks in the VARÂ parameters. We investigate the in-sample and forecasting performance of our model in an application involving a commonly-used US macroeconomic data set. In a recursive forecasting exercise, we find moderate improvements over a standard VAR, although most of these improvements are due to the use of stochastic search variable selection rather than to the inclusion of breaks.

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Article provided by Elsevier in its journal International Journal of Forecasting.

Volume (Year): 26 (2010)
Issue (Month): 2 (April)
Pages: 326-347

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Handle: RePEc:eee:intfor:v:26:y::i:2:p:326-347
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  15. Lubos Pastor & Robert F. Stambaugh, . "The Equity Premium and Structural Breaks," Rodney L. White Center for Financial Research Working Papers 11-00, Wharton School Rodney L. White Center for Financial Research.
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  31. Chib, Siddhartha, 1996. "Calculating posterior distributions and modal estimates in Markov mixture models," Journal of Econometrics, Elsevier, vol. 75(1), pages 79-97, November.
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