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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. Working paper. University of Strathclyde, Glasgow. (Unpublished)

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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.