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Forecasting with Medium and Large Bayesian VARs

Author

Listed:
  • Gary Koop

    (University of Strathclyde; The Rimini Centre for Economic Analysis (RCEA))

Abstract
This paper is motivated by the recent interest in the use of Bayesian VARs for forecasting, even in cases where the number of dependent variables is large. In such cases, factor methods have been traditionally used but recent work using a particular prior suggests that Bayesian VAR methods can forecast better. In this paper, we consider a range of alternative priors which have been used with small VARs, discuss the issues which arise when they are used with medium and large VARs and examine their forecast performance using a US macroeconomic data set containing 168 variables. We find that Bayesian VARs do tend to forecast better than factor methods and provide an extensive comparison of the strengths and weaknesses of various approaches. Our empirical results show the importance of using forecast metrics which use the entire predictive density, instead of using only point forecasts.

Suggested Citation

  • Gary Koop, 2010. "Forecasting with Medium and Large Bayesian VARs," Working Paper series 43_10, Rimini Centre for Economic Analysis.
  • Handle: RePEc:rim:rimwps:43_10
    as

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    File URL: http://www.rcea.org/RePEc/pdf/wp43_10.pdf
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    References listed on IDEAS

    as
    1. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 2003. "Do financial variables help forecasting inflation and real activity in the euro area?," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1243-1255, September.
    2. Marta Bańbura, 2008. "Large Bayesian VARs," 2008 Meeting Papers 334, Society for Economic Dynamics.
    3. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148, Elsevier.
    4. Marcellino, Massimiliano & Stock, James H. & Watson, Mark W., 2006. "A comparison of direct and iterated multistep AR methods for forecasting macroeconomic time series," Journal of Econometrics, Elsevier, vol. 135(1-2), pages 499-526.
    5. Marta Banbura & Domenico Giannone & Lucrezia Reichlin, 2010. "Large Bayesian vector auto regressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(1), pages 71-92.
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    7. P. J. Brown & M. Vannucci & T. Fearn, 1998. "Multivariate Bayesian variable selection and prediction," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 60(3), pages 627-641.
    8. 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.
    9. Michele Battisti & Massimo Del Gatto & Christopher F. Parmeter, 2019. "Skill Biased Technical Change and Misallocation. A Unified Framework and a country-sector exercize," Working Paper series 19-08, Rimini Centre for Economic Analysis.
    10. repec:ulb:ulbeco:2013/13388 is not listed on IDEAS
    11. Marta Banbura & Domenico Giannone & Lucrezia Reichlin, 2010. "Large Bayesian vector auto regressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(1), pages 71-92.
    12. Dimitris Korobilis, 2008. "Forecasting in vector autoregressions with many predictors," Advances in Econometrics, in: Bayesian Econometrics, pages 403-431, Emerald Group Publishing Limited.
    13. Litterman, Robert B, 1986. "Forecasting with Bayesian Vector Autoregressions-Five Years of Experience," Journal of Business & Economic Statistics, American Statistical Association, vol. 4(1), pages 25-38, January.
    14. Jochmann, Markus & Koop, Gary & Strachan, Rodney W., 2010. "Bayesian forecasting using stochastic search variable selection in a VAR subject to breaks," International Journal of Forecasting, Elsevier, vol. 26(2), pages 326-347, April.
    15. Poirier, Dale J., 1998. "Revising Beliefs In Nonidentified Models," Econometric Theory, Cambridge University Press, vol. 14(4), pages 483-509, August.
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    17. 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.
    18. Kadiyala, K Rao & Karlsson, Sune, 1997. "Numerical Methods for Estimation and Inference in Bayesian VAR-Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(2), pages 99-132, March-Apr.
    19. Litterman, Robert, 1986. "Forecasting with Bayesian vector autoregressions -- Five years of experience : Robert B. Litterman, Journal of Business and Economic Statistics 4 (1986) 25-38," International Journal of Forecasting, Elsevier, vol. 2(4), pages 497-498.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Bayesian; Minnesota prior; stochastic search variable selection; predictive likelihood;
    All these keywords.

    JEL classification:

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

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