Qual Var Revisited: Good Forecast, Bad Story
Makram El-Shagi and
Gregor von Schweinitz
Journal of Applied Economics, 2016, vol. 19, issue 2, 293-321
Abstract:
Due to the recent financial crisis, the interest in econometric models that allow to incorporate binary variables (such as the occurrence of a crisis) experienced a huge surge. This paper evaluates the performance of the Qual VAR, originally proposed by Dueker (2005). The Qual VAR is a VAR model including a latent variable that governs the behavior of an observable binary variable. While we find that the Qual VAR performs reasonable well in forecasting (outperforming a probit benchmark), there are substantial identification problems even in a simple VAR specification. Typically, identification in economic applications is far more difficult than in our simple benchmark. Therefore, when the economic interpretation of the dynamic behavior of the latent variable and the chain of causality matter, use of the Qual VAR is inadvisable.
Date: 2016
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Journal Article: Qual VAR revisited: Good forecast, bad story (2016) 
Working Paper: Qual VAR Revisited: Good Forecast, Bad Story (2012) 
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Persistent link: https://EconPapers.repec.org/RePEc:taf:recsxx:v:19:y:2016:i:2:p:293-321
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DOI: 10.1016/S1514-0326(16)30012-5
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