Forecasting with dimension switching VARs

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Koop, Gary (2014) Forecasting with dimension switching VARs. International Journal of Forecasting, 30 (2). pp. 280-290. ISSN 0169-2070 (https://doi.org/10.1016/j.ijforecast.2013.09.005)

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Abstract

This paper develops methods for VAR forecasting when the researcher is uncertain about which variables enter the VAR, and the dimension of the VAR may be changing over time. It considers the case where there are N variables which might potentially enter a VAR and the researcher is interested in forecasting N ∗ of them. Thus, the researcher is faced with 2 N − N ∗ potential VARs. If N is large, conventional Bayesian methods can be infeasible due to the computational burden of dealing with a huge model space. Allowing for the dimension of the VAR to change over time only increases this burden. In light of these considerations, this paper uses computationally practical approximations adapted from the dynamic model averaging literature in order to develop methods for dynamic dimension selection (DDS) in VARs. We then show the benefits of DDS in a macroeconomic forecasting application. In particular, DDS switches between different parsimonious VARs and forecasts appreciably better than various small and large dimensional VARs.

ORCID iDs

Koop, Gary ORCID logoORCID: https://orcid.org/0000-0002-6091-378X;
  • Item type:Article
    ID code:52341
    Dates:
    Date
    Event
    April 2014
    Published
    22 December 2013
    Published Online
    Notes:NOTICE: this is the author’s version of a work that was accepted for publication in International Journal of Forecasting. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in International Journal of Forecasting, VOL 30, ISSUE 2, (April–June 2014) DOI 10.1016/j.ijforecast.2013.09.005
    Subjects:Social Sciences > Economic Theory
    Department:Strathclyde Business School > Economics
    Depositing user: Pure Administrator
    Date deposited:31 Mar 2015 07:22
    Last modified:22 Nov 2024 01:09
    Related URLs:
    URI:https://strathprints.strath.ac.uk/id/eprint/52341
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