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Moving Average Stochastic Volatility Models with Application to Inflation Forecast

Joshua Chan

ANU Working Papers in Economics and Econometrics from Australian National University, College of Business and Economics, School of Economics

Abstract: Moving average and stochastic volatility are two important components for modeling and forecasting macroeconomic and financial time series. The former aims to capture short-run dynamics, whereas the latter allows for volatility clustering and time-varying volatility. We introduce a new class of models that includes both of these useful features. The new models allow the conditional mean process to have a state space form. As such, this general framework includes a wide variety of popular specifications, including the unobserved components and time-varying parameter models. Having a moving average process, however, means that the errors in the measurement equation are no longer serially independent, and estimation becomes more difficult. We develop a posterior simulator that builds upon recent advances in precision-based algorithms for estimating this new class of models. In an empirical application involving U.S. inflation we find that these moving average stochastic volatility models provide better in-sample fitness and out-of-sample forecast performance than the standard variants with only stochastic volatility.

JEL-codes: C11 C51 C53 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-for
Date: 2012-10
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Journal Article: Moving average stochastic volatility models with application to inflation forecast (2013) Downloads
Working Paper: Moving Average Stochastic Volatility Models with Application to Inflation Forecast (2013) Downloads
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