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Combining VAR Forecast Densities Using Fast Fourier Transform

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  • Jakub Ryšánek

Abstract

In this paper, I propose the use of fast Fourier transform (FFT) as a convenient tool for combining forecast densities of vector autoregressive models in a hybrid Bayesian manner. While a vast amount of papers comprises combinations based on normal approximations, Monte Carlo methods were fully utilized here, which made the analysis computationally demanding. For the sake of minimization of computational time, the FFT algorithm was used to combine the densities of poorly simulated partial models. As a result, a minor loss of quality in the final combined model was allowed, in contrast with the reduction in the necessary simulation time. However, it turns out in the end that the FFT-based approach exceeds 'brute-force' simulation in all aspects. The suggested method is demonstrated on an ex ante prediction of the Czech GDP and on a pair of artificial examples.

Suggested Citation

  • Jakub Ryšánek, 2010. "Combining VAR Forecast Densities Using Fast Fourier Transform," Acta Oeconomica Pragensia, Prague University of Economics and Business, vol. 2010(5), pages 72-88.
  • Handle: RePEc:prg:jnlaop:v:2010:y:2010:i:5:id:318:p:72-88
    DOI: 10.18267/j.aop.318
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    References listed on IDEAS

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    More about this item

    Keywords

    Bayesian model averaging; fast Fourier transform; Markov chain Monte Carlo; vector autoregressions;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications

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