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Time-varying Local Projections with Stochastic Volatility

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  • NAKAJIMA, Jouchi

Abstract

This study discusses a general approach to dynamic modeling using the local projection (LP) method. Previous studies have proposed time-varying (TV) parameters in LPs; however, they did not address possible variations in error variances. Overlooking this could introduce significant bias in the estimate of the TV parameter, and consequently, the estimated impulse response. We develop an estimation strategy for LPs with stochastic volatility (SV) and illustrate the importance of SV inclusion using simulated data. Application to a topical macroeconomic time-series analysis illustrates the benefits of the proposed approach in terms of improved predictions.

Suggested Citation

  • NAKAJIMA, Jouchi, 2025. "Time-varying Local Projections with Stochastic Volatility," Discussion Paper Series 761, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hit:hituec:761
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    File URL: https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/85120/DP761.pdf
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    More about this item

    Keywords

    Local projections; Time-varying parameters; Stochastic volatility;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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