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

Author

Listed:
  • Markus Jochmann

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

  • Gary Koop

    () (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)

Abstract

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 structural 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.

Suggested Citation

  • Markus Jochmann & Gary Koop & Rodney W. Strachan, 2008. "Bayesian Forecasting using Stochastic Search Variable Selection in a VAR Subject to Breaks," Working Paper series 19_08, Rimini Centre for Economic Analysis.
    • Handle: RePEc:rim:rimwps:19_08
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    References listed on IDEAS

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    Cited by:

    1. Dimitris, Korobilis, 2013. "Forecasting with Factor Models: A Bayesian Model Averaging Perspective," MPRA Paper 52724, University Library of Munich, Germany.
    2. Wilson, Kevin J., 2017. "An investigation of dependence in expert judgement studies with multiple experts," International Journal of Forecasting, Elsevier, vol. 33(1), pages 325-336.
    3. Markus Jochmann & Gary Koop & Roberto Leon‐Gonzalez & Rodney W. Strachan, 2013. "Stochastic search variable selection in vector error correction models with an application to a model of the UK macroeconomy," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 28(1), pages 62-81, January.
    4. Gary M. Koop, 2013. "Forecasting with Medium and Large Bayesian VARS," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 28(2), pages 177-203, March.
    5. Knut Are Aastveit & Anne Sofie Jore & Francesco Ravazzolo, 2014. "Forecasting recessions in real time," Working Paper 2014/02, Norges Bank.
    6. Karlsson, Sune, 2013. "Forecasting with Bayesian Vector Autoregression," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.),Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 791-897, Elsevier.
    7. Nikolaus Hautsch & Fuyu Yang, 2014. "Bayesian Stochastic Search for the Best Predictors: Nowcasting GDP Growth," University of East Anglia Applied and Financial Economics Working Paper Series 056, School of Economics, University of East Anglia, Norwich, UK..
    8. Koop, Gary & Korobilis, Dimitris, 2013. "Large time-varying parameter VARs," Journal of Econometrics, Elsevier, vol. 177(2), pages 185-198.
    9. Chan, Joshua C.C. & Koop, Gary, 2014. "Modelling breaks and clusters in the steady states of macroeconomic variables," Computational Statistics & Data Analysis, Elsevier, vol. 76(C), pages 186-193.
    10. Billio, Monica & Casarin, Roberto & Ravazzolo, Francesco & van Dijk, Herman K., 2012. "Combination schemes for turning point predictions," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(4), pages 402-412.
    11. Dimitris Korobilis, 2013. "Var Forecasting Using Bayesian Variable Selection," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 28(2), pages 204-230, March.
    12. SENBETA, Sisay Regassa, 2012. "How important are external shocks in explaining growth in Sub-Saharan Africa? Evidence from a Bayesian VAR," Working Papers 2012010, University of Antwerp, Faculty of Business and Economics.
    13. Paul Hofmarcher & Jesús Crespo Cuaresma & Bettina Grün & Kurt Hornik, 2015. "Last Night a Shrinkage Saved My Life: Economic Growth, Model Uncertainty and Correlated Regressors," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 34(2), pages 133-144, March.
    14. Stephen G. Hall & Heather D. Gibson & G. S. Tavlas & Mike G. Tsionas, 2020. "A Monte Carlo Study of Time Varying Coefficient (TVC) Estimation," Computational Economics, Springer;Society for Computational Economics, vol. 56(1), pages 115-130, June.
    15. Smith, Simon C. & Timmermann, Allan & Zhu, Yinchu, 2019. "Variable selection in panel models with breaks," Journal of Econometrics, Elsevier, vol. 212(1), pages 323-344.
    16. Ahlem DAHEM, 2016. "Short-Term Bayesian Inflation Forecasting For Tunisia: Some Empirical Evidence," EcoForum, "Stefan cel Mare" University of Suceava, Romania, Faculty of Economics and Public Administration - Economy, Business Administration and Tourism Department., vol. 5(1), pages 1-47, January.
    17. Schnücker, Annika, 2016. "Restrictions Search for Panel VARs," Annual Conference 2016 (Augsburg): Demographic Change 145566, Verein für Socialpolitik / German Economic Association.
    18. Karol Szafranek, 2017. "Bagged artificial neural networks in forecasting inflation: An extensive comparison with current modelling frameworks," NBP Working Papers 262, Narodowy Bank Polski, Economic Research Department.
    19. Rangan Gupta & Rudi Steinbach, 2010. "Forecasting Key Macroeconomic Variables of the South African Economy: A Small Open Economy New Keynesian DSGE-VAR Model," Working Papers 201019, University of Pretoria, Department of Economics.
    20. Annika Schnücker, 2016. "Restrictions Search for Panel VARs," Discussion Papers of DIW Berlin 1612, DIW Berlin, German Institute for Economic Research.
    21. Kang, Wensheng & Ratti, Ronald A. & Yoon, Kyung Hwan, 2015. "Time-varying effect of oil market shocks on the stock market," Journal of Banking & Finance, Elsevier, vol. 61(S2), pages 150-163.
    22. Gupta, Rangan & Steinbach, Rudi, 2013. "A DSGE-VAR model for forecasting key South African macroeconomic variables," Economic Modelling, Elsevier, vol. 33(C), pages 19-33.
    23. P.A.V.B. Swamy & Stephen G. Hall & George S. Tavlas & I-Lok Chang & Heather D. Gibson & William H. Greene & Jatinder S. Mehta, 2016. "A Method for Measuring Treatment Effects on the Treated without Randomization," Econometrics, MDPI, Open Access Journal, vol. 4(2), pages 1-23, March.
    24. Jiang, Yu & Song, Zhe & Kusiak, Andrew, 2013. "Very short-term wind speed forecasting with Bayesian structural break model," Renewable Energy, Elsevier, vol. 50(C), pages 637-647.
    25. Dahem, Ahlem, 2015. "Short term Bayesian inflation forecasting for Tunisia," MPRA Paper 66702, University Library of Munich, Germany.

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