Karapanagiotidis, Paul (2012): Improving Bayesian VAR density forecasts through autoregressive Wishart Stochastic Volatility.

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Abstract
Dramatic changes in macroeconomic time series volatility pose a challenge to contemporary vector autoregressive (VAR) forecasting models. Traditionally, the conditional volatility of such models had been assumed constant over time or allowed for breaks across long time periods. More recent work, however, has improved forecasts by allowing the conditional volatility to be completely time variant by specifying the VAR innovation variance as a distinct discrete time process. For example, Clark (2011) specifies the volatility process as an independent log random walk for each time series in the VAR. Unfortunately, there is no empirical reason to believe that the VAR innovation volatility process of macroeconomic growth series follow log random walks, nor that the volatility of each series is independent of the others. This suggests that a more robust specification on the volatility process—one that both accounts for copersistence in conditional volatility across time series and exhibits mean reverting behaviour—should improve density forecasts, especially over the long run forecasting horizon. In this respect, I employ a latent InverseWishart autoregressive stochastic volatility specification on the conditional variance equation of a Bayesian VAR, with U.S. macroeconomic time series data, in evaluating Bayesian forecast efficiency against a competing log random walk specification by Clark (2011).
Item Type:  MPRA Paper 

Original Title:  Improving Bayesian VAR density forecasts through autoregressive Wishart Stochastic Volatility 
Language:  English 
Keywords:  InverseWishart distribution; stochastic volatility; predictive likelihoods; MCMC; macroeconomic time series; density forecasts; vector autoregression; steady state priors; Bayesian econometrics; 
Subjects:  C  Mathematical and Quantitative Methods > C3  Multiple or Simultaneous Equation Models; Multiple Variables > C32  TimeSeries Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models C  Mathematical and Quantitative Methods > C5  Econometric Modeling > C53  Forecasting and Prediction Methods; Simulation Methods E  Macroeconomics and Monetary Economics > E1  General Aggregative Models > E17  Forecasting and Simulation: Models and Applications C  Mathematical and Quantitative Methods > C1  Econometric and Statistical Methods and Methodology: General > C11  Bayesian Analysis: General 
Item ID:  38885 
Depositing User:  Paul Karapanagiotidis 
Date Deposited:  18. May 2012 23:16 
Last Modified:  19. Feb 2013 09:54 
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URI:  http://mpra.ub.unimuenchen.de/id/eprint/38885 