Forecasting using variational Bayesian inference in large vector autoregressions with hierarchical shrinkage

Deborah Gefang, Gary Koop and Aubrey Poon

International Journal of Forecasting, 2023, vol. 39, issue 1, 346-363

Abstract: Many recent papers in macroeconomics have used large vector autoregressions (VARs) involving 100 or more dependent variables. With so many parameters to estimate, Bayesian prior shrinkage is vital to achieve reasonable results. Computational concerns currently limit the range of priors used and render difficult the addition of empirically important features such as stochastic volatility to the large VAR. In this paper, we develop variational Bayesian methods for large VARs that overcome the computational hurdle and allow for Bayesian inference in large VARs with a range of hierarchical shrinkage priors and with time-varying volatilities. We demonstrate the computational feasibility and good forecast performance of our methods in an empirical application involving a large quarterly US macroeconomic data set.

Keywords: Variational inference; Vector autoregression; Stochastic volatility; Hierarchical prior; Forecasting (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfor:v:39:y:2023:i:1:p:346-363

DOI: 10.1016/j.ijforecast.2021.11.012

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