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Forecasts in a Slightly Misspecified Finite Order VAR Model

Author

Listed:
  • Ulrich K. Müller

    (Princeton University)

  • James H. Stock

    (Harvard University)

Abstract

We propose a Bayesian procedure for exploiting small, possibly long-lag linear predictability in the innovations of a finite order autoregression. We model the innovations as having a log-spectral density that is a continuous mean-zero Gaussian process of order 1/√T. This local embedding makes the problem asymptotically a normal-normal Bayes problem, resulting in closed-form solutions for the best forecast. When applied to data on 132 U.S. monthly macroeconomic time series, the method is found to improve upon autoregressive forecasts by an amount consistent with the theoretical and Monte Carlo calculations.

Suggested Citation

  • Ulrich K. Müller & James H. Stock, 2011. "Forecasts in a Slightly Misspecified Finite Order VAR Model," Working Papers 2011-4, Princeton University. Economics Department..
    • Handle: RePEc:pri:econom:2011-4
    as

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    File URL: http://www.princeton.edu/~umueller/ssforecast.pdf
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    References listed on IDEAS

    as
    1. C. K. Carter & R. Kohn, 1997. "Semiparametric Bayesian Inference for Time Series with Mixed Spectra," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 59(1), pages 255-268.
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    6. Rosen, Ori & Stoffer, David S. & Wood, Sally, 2009. "Local Spectral Analysis via a Bayesian Mixture of Smoothing Splines," Journal of the American Statistical Association, American Statistical Association, vol. 104(485), pages 249-262.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Spectral Domain Prior; Posterior Approximation; Information Criteria;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • 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
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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