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Bayesian Forecasting using Stochastic Search Variable Selection in a VAR Subject to Breaks

  • Gary Koop


    (University of Strathclyde, Glasgow, UK and The Rimini Centre for Economic Analysis, Italy)

  • Markus Jochmann

    (University of Strathclyde, Glasgow, UK and The Rimini Centre for Economic Analysis, Italy)

  • Rodney W. Strachan

    (University of Queensland, UK and The Rimini Centre for Economic Analysis, Italy)

This paper builds a model which has two extensions over a standard VAR. The first of these is stochastic search variable selection, which is an automatic model selection device which allows for coefficients in a possibly over-parameterized VAR to be set to zero. The second allows for an unknown number of structual breaks in the VAR parameters. We investigate the in-sample and forecasting performance of our model in an application involving a commonly-used US macro-economic data set. We find that, in-sample, these extensions clearly are warranted. In a recursive forecasting exercise, we find moderate improvements over a standard VAR, although most of these improvements are due to the use of stochastic search variable selection rather than the inclusion of breaks. Classification-JEL:

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Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 19-08.

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Date of creation: Jan 2008
Date of revision: Jan 2008
Handle: RePEc:rim:rimwps:19-08
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  5. Maheu, John M. & McCurdy, Thomas H., 2009. "How Useful are Historical Data for Forecasting the Long-Run Equity Return Distribution?," Journal of Business & Economic Statistics, American Statistical Association, vol. 27, pages 95-112.
  6. Chib, Siddhartha, 1996. "Calculating posterior distributions and modal estimates in Markov mixture models," Journal of Econometrics, Elsevier, vol. 75(1), pages 79-97, November.
  7. George, Edward I. & Sun, Dongchu & Ni, Shawn, 2008. "Bayesian stochastic search for VAR model restrictions," Journal of Econometrics, Elsevier, vol. 142(1), pages 553-580, January.
  8. Andersson, Michael K & Karlsson, Sune, 2007. "Bayesian forecast combination for VAR models," Working Paper Series 216, Sveriges Riksbank (Central Bank of Sweden).
  9. Chang-Jin Kim & Charles Nelson & Jeremy M. Piger, 2003. "The less volatile U.S. economy: a Bayesian investigation of timing, breadth, and potential explanations," Working Papers 2001-016, Federal Reserve Bank of St. Louis.
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  12. Gary M. Koop & Simon M. Potter, 2004. "Prior elicitation in multiple change-point models," Staff Reports 197, Federal Reserve Bank of New York.
  13. Korobilis, Dimitris, 2008. "Forecasting in vector autoregressions with many predictors," MPRA Paper 21122, University Library of Munich, Germany.
  14. Stock, James H & Watson, Mark W, 1996. "Evidence on Structural Instability in Macroeconomic Time Series Relations," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(1), pages 11-30, January.
  15. Valentina Corradi & Norman Swanson, 2004. "Predictive Density Evaluation," Departmental Working Papers 200419, Rutgers University, Department of Economics.
  16. Massimiliano Marcellino & James Stock & Mark Watson, 2005. "A Comparison of Direct and Iterated Multistep AR Methods for Forecasting Macroeconomic Time Series," Working Papers 285, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
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  19. Gary Koop & Simon M. Potter, 2007. "Estimation and Forecasting in Models with Multiple Breaks," Review of Economic Studies, Oxford University Press, vol. 74(3), pages 763-789.
  20. repec:cup:cbooks:9780521632423 is not listed on IDEAS
  21. Gary Koop & Simon M. Potter, 2001. "Are apparent findings of nonlinearity due to structural instability in economic time series?," Econometrics Journal, Royal Economic Society, vol. 4(1), pages 38.
  22. Andrew Ang & Geert Bekaert, 1998. "Regime Switches in Interest Rates," NBER Working Papers 6508, National Bureau of Economic Research, Inc.
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  24. Chib, Siddhartha, 1998. "Estimation and comparison of multiple change-point models," Journal of Econometrics, Elsevier, vol. 86(2), pages 221-241, June.
  25. Geweke, John & Whiteman, Charles, 2006. "Bayesian Forecasting," Handbook of Economic Forecasting, Elsevier.
  26. Gary Koop & Simon Potter, 2004. "Forecasting in dynamic factor models using Bayesian model averaging," Econometrics Journal, Royal Economic Society, vol. 7(2), pages 550-565, December.
  27. Hall, Anthony D & Anderson, Heather M & Granger, Clive W J, 1992. "A Cointegration Analysis of Treasury Bill Yields," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 116-26, February.
  28. Valentina Corradi & Norman Swanson, 2006. "Predictive Density Evaluation. Revised," Departmental Working Papers 200621, Rutgers University, Department of Economics.
  29. Giorgio E. Primiceri, 2005. "Time Varying Structural Vector Autoregressions and Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 821-852.
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