Addressing COVID-19 Outliers in BVARs with Stochastic Volatility

Massimiliano Marcellino, Todd Clark, Andrea Carriero and Elmar Mertens

No 15964, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Incoming data in 2020 posed sizable challenges for the use of VARs in economic analysis: Enormous movements in a number of series have had strong effects on parameters and forecasts constructed with standard VAR methods. We propose the use of VAR models with time-varying volatility that include a treatment of the COVID extremes as outlier observations. Typical VARs with time-varying volatility assume changes in uncertainty to be highly persistent. Instead, we adopt an outlier-adjusted stochastic volatility (SV) model for VAR residuals that combines transitory and persistent changes in volatility. In addition, we consider the treatment of outliers as missing data. Evaluating forecast performance over the last few decades in quasi-real time, we find that the outlier-augmented SV scheme does at least as well as a conventional SV model, while both out-perform standard homoskedastic VARs. Point forecasts made in 2020 from heteroskedastic VARs are much less sensitive to outliers in the data, and the outlier-adjusted SV model generates more reasonable gauges of forecast uncertainty than a standard SV model. At least pre-COVID, a close alternative to the outlier-adjusted model is an SV model with t-distributed shocks. Treating outliers as missing data also generates better-behaved forecasts than the conventional SV model. However, since uncertainty about the incidence of outliers is ignored in that approach, it leads to strikingly tight predictive densities.

Keywords: Bayesian vars; stochastic volatility; Outliers; Pandemics; forecasts (search for similar items in EconPapers)
JEL-codes: C53 E17 E37 F47 (search for similar items in EconPapers)
Date: 2021-03
New Economics Papers: this item is included in nep-for, nep-mac and nep-ore
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Citations: View citations in EconPapers (28)

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Related works:
Journal Article: Addressing COVID-19 Outliers in BVARs with Stochastic Volatility (2024)
Working Paper: Addressing COVID-19 outliers in BVARs with stochastic volatility (2022)
Working Paper: Addressing COVID-19 Outliers in BVARs with Stochastic Volatility (2021)
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