Bayesian nonparametric vector autoregressive models

Maria Kalli and Jim Griffin

Journal of Econometrics, 2018, vol. 203, issue 2, 267-282

Abstract: Vector autoregressive (VAR) models are the main work-horse models for macroeconomic forecasting, and provide a framework for the analysis of complex dynamics that are present between macroeconomic variables. Whether a classical or a Bayesian approach is adopted, most VAR models are linear with Gaussian innovations. This can limit the model’s ability to explain the relationships in macroeconomic series. We propose a nonparametric VAR model that allows for nonlinearity in the conditional mean, heteroscedasticity in the conditional variance, and non-Gaussian innovations. Our approach differs from that of previous studies by modelling the stationary and transition densities using Bayesian nonparametric methods. Our Bayesian nonparametric VAR (BayesNP-VAR) model is applied to US and UK macroeconomic time series, and compared to other Bayesian VAR models. We show that BayesNP-VAR is a flexible model that is able to account for nonlinear relationships as well as heteroscedasticity in the data. In terms of short-run out-of-sample forecasts, we show that BayesNP-VAR predictively outperforms competing models.

Keywords: Vector autoregressive models; Dirichlet process prior; Infinite mixtures; Markov chain Monte Carlo (search for similar items in EconPapers)
JEL-codes: C11 C15 C52 C53 C58 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:203:y:2018:i:2:p:267-282

DOI: 10.1016/j.jeconom.2017.11.009

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