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Moving Average Stochastic Volatility Models with Application to Inflation Forecast

  • Joshua C C Chan

    ()

Moving average and stochastic volatility are two important components for modeling and forecasting macroeconomic and financial time series. The former aims to capture short-run dynamics, whereas the latter allows for volatility clustering and time-varying volatility. We introduce a new class of models that includes both of these useful features. The new models allow the conditional mean process to have a state space form. As such, this general framework includes a wide variety of popular specifications, including the unobserved components and time-varying parameter models. Having a moving average process, however, means that the errors in the measurement equation are no longer serially independent, and estimation becomes more difficult. We develop a posterior simulator that builds upon recent advances in precision-based algorithms for estimating this new class of models. In an empirical application involving U.S. inflation we find that these moving average stochastic volatility models provide better in-sample fitness and out-of-sample forecast performance than the standard variants with only stochastic volatility.

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File URL: https://www.cbe.anu.edu.au/researchpapers/econ/wp591.pdf
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Paper provided by Australian National University, College of Business and Economics, School of Economics in its series ANU Working Papers in Economics and Econometrics with number 2012-591.

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Length: 26 Pages
Date of creation: Oct 2012
Date of revision:
Handle: RePEc:acb:cbeeco:2012-591
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