Bayesian forecasting using stochastic search variable selection in a VAR subject to breaks

Jochmann, Markus and Koop, Gary and Strachan, Rodney W. (2008) Bayesian forecasting using stochastic search variable selection in a VAR subject to breaks. Preprint / Working Paper. University of Strathclyde, Glasgow. (Unpublished)

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Abstract

This paper builds a model which has two extensions over a standard VAR. The …rst 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 …nd that, in-sample, these extensions clearly are warranted. In a recursive forecasting exercise, we …nd 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.

ORCID iDs

Jochmann, Markus, Koop, Gary ORCID logoORCID: https://orcid.org/0000-0002-6091-378X and Strachan, Rodney W.;
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