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Flexible Fat-tailed Vector Autoregression

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Abstract

We propose a general class of multivariate fat-tailed distributions which includes the normal, t and Laplace distributions as special cases as well as their mixture. Full conditional posterior distributions for the Bayesian VAR-model are derived and used to construct a MCMC-sampler for the joint posterior distribution. The framework allows for selection of a specific special case as the distribution for the error terms in the VAR if the evidence in the data is strong while at the same time allowing for considerable flexibility and more general distributions than offered by any of the special cases. As fat tails can also be a sign of conditional heteroskedasticity we also extend the model to allow for stochastic volatility. The performance is evaluated using simulated data and the utility of the general model specification is demonstrated in applications to macroeconomics.

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  • Karlsson, Sune & Mazur, Stepan, 2020. "Flexible Fat-tailed Vector Autoregression," Working Papers 2020:5, Örebro University, School of Business.
    • Handle: RePEc:hhs:oruesi:2020_005
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    Keywords

    Scale mixture of normals; Elliptically contoured distribution; Mixture distributions; Stochastic volatility; Markov Chain Monte Carlo;
    All these keywords.

    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
    • C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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