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VARs, Cointegration and Common Cycle Restrictions

  • Heather M Anderson

    ()

  • Farshid Vahid

    ()

This paper argues that VAR models with cointegration and common cycles can be usefully viewed as observable factor models. The factors are linear combinations of lagged levels and lagged differences, and as such, these observable factors have potential for forecasting. We illustrate this forecast potential in both a Monte Carlo and empirical setting, and demonstrate the difficulties in developing forecasting "rules of thumb" for forecasting in multivariate systems.

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File URL: http://www.buseco.monash.edu.au/ebs/pubs/wpapers/2010/wp14-10.pdf
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Paper provided by Monash University, Department of Econometrics and Business Statistics in its series Monash Econometrics and Business Statistics Working Papers with number 14/10.

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Length: 50 pages
Date of creation: May 2010
Date of revision:
Handle: RePEc:msh:ebswps:2010-14
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  1. Daniel F. Waggoner & Tao Zha, 1998. "Conditional forecasts in dynamic multivariate models," FRB Atlanta Working Paper 98-22, Federal Reserve Bank of Atlanta.
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  3. Vahid, F & Engle, Robert F, 1993. "Common Trends and Common Cycles," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(4), pages 341-60, Oct.-Dec..
  4. Athanasopoulos, George & Guillen, Osmani Teixeira Carvalho & Jaime Júnior, Pedro & Vahid, Farshid, 2011. "Model selection, estimation and forecasting in VAR models with short-run and long-run restrictions," Economics Working Papers (Ensaios Economicos da EPGE) 713, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  5. Vahid, Farshid & Jaime Júnior, Pedro, 2001. "The Importance of Common Cyclical Features in VAR Analysis: A Monte-Carlo Study," Economics Working Papers (Ensaios Economicos da EPGE) 417, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  6. Siliverstovs, Boriss & Engsted, Tom & Haldrup, Niels, 2002. "Long-Run Forecasting in Multicointegrated Systems," Finance Working Papers 02-14, University of Aarhus, Aarhus School of Business, Department of Business Studies.
  7. MacKinnon, James G & Haug, Alfred A & Michelis, Leo, 1999. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 563-77, Sept.-Oct.
  8. Engle, Robert F & Kozicki, Sharon, 1993. "Testing for Common Features," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(4), pages 369-80, October.
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  13. Anderson, Heather M. & Low, Chin Nam & Snyder, Ralph, 2006. "Single source of error state space approach to the Beveridge Nelson decomposition," Economics Letters, Elsevier, vol. 91(1), pages 104-109, April.
  14. Gonzalo, Jesus & Pitarakis, Jean-Yves, 1998. "Specification via model selection in vector error correction models," Economics Letters, Elsevier, vol. 60(3), pages 321-328, September.
  15. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  16. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  17. Michael P. Clements & David F. Hendry, 2002. "Modelling methodology and forecast failure," Econometrics Journal, Royal Economic Society, vol. 5(2), pages 319-344, 06.
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  19. Gary Koop & Roberto León-González & Rodney W. Strachan, 2005. "Efficient Posterior Simulation for Cointegrated Models with Priors On the Cointegration Space," Discussion Papers in Economics 05/13, Department of Economics, University of Leicester, revised Apr 2006.
  20. Elliott, Graham, 2006. "Forecasting with Trending Data," Handbook of Economic Forecasting, Elsevier.
  21. Engle, Robert F. & Yoo, Byung Sam, 1987. "Forecasting and testing in co-integrated systems," Journal of Econometrics, Elsevier, vol. 35(1), pages 143-159, May.
  22. Anderson, Heather M. & Vahid, Farshid, 1998. "Testing multiple equation systems for common nonlinear components," Journal of Econometrics, Elsevier, vol. 84(1), pages 1-36, May.
  23. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, July.
  24. Peter F. Christoffersen & Francis X. Diebold, 1997. "Cointegration and long-horizon forecasting," Working Papers 97-14, Federal Reserve Bank of Philadelphia.
  25. Thomas Doan & Robert B. Litterman & Christopher A. Sims, 1983. "Forecasting and Conditional Projection Using Realistic Prior Distributions," NBER Working Papers 1202, National Bureau of Economic Research, Inc.
  26. Sims, Christopher A & Zha, Tao, 1998. "Bayesian Methods for Dynamic Multivariate Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 949-68, November.
  27. Engle, Robert F & Kozicki, Sharon, 1993. "Testing for Common Features: Reply," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(4), pages 393-95, October.
  28. Hendry, David F. & Massmann, Michael, 2007. "Co-Breaking: Recent Advances and a Synopsis of the Literature," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 33-51, January.
  29. LeSage, James P, 1990. "A Comparison of the Forecasting Ability of ECM and VAR Models," The Review of Economics and Statistics, MIT Press, vol. 72(4), pages 664-71, November.
  30. Aznar, Antonio & Salvador, Manuel, 2002. "Selecting The Rank Of The Cointegration Space And The Form Of The Intercept Using An Information Criterion," Econometric Theory, Cambridge University Press, vol. 18(04), pages 926-947, August.
  31. Hoffman, Dennis L & Rasche, Robert H, 1996. "Assessing Forecast Performance in a Cointegrated System," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(5), pages 495-517, Sept.-Oct.
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