Model Averaging for Time-Varying Vector Autoregressions

Yuying Sun, Feng Chen and Jiti Gao

No 1/25, Monash Econometrics and Business Statistics Working Papers from Monash University, Department of Econometrics and Business Statistics

Abstract: This paper proposes a novel time-varying model averaging (TVMA) approach to enhancing forecast accuracy for multivariate time series subject to structural changes. The TVMA method averages predictions from a set of time-varying vector autoregressive models using optimal time-varying combination weights selected by minimizing a penalized local criterion. This allows the relative importance of different models to adaptively evolve over time in response to structural shifts. We establish an asymptotic optimality for the proposed TVMA approach in achieving the lowest possible quadratic forecast errors. The convergence rate of the selected time-varying weights to the optimal weights minimizing expected quadratic errors is derived. Moreover, we show that when one or more correctly specified models exist, our method consistently assigns full weight to them, and an asymptotic normality for the TVMA estimators under some regularity conditions can be established. Furthermore, the proposed approach encompasses special cases including time-varying VAR models with exogenous predictors, as well as time-varying factor augmented VAR (FAVAR) models. Simulations and an empirical application illustrate the proposed TVMA method outperforms some commonly used model averaging and selection methods in the presence of structural changes.

Keywords: : Asymptotic Optimality; Consistency; Structural Change; Time-varying Weight (search for similar items in EconPapers)
JEL-codes: C52 C53 (search for similar items in EconPapers)
Pages: Â 64
Date: 2025
New Economics Papers: this item is included in nep-ecm and nep-ets
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