Composite likelihood methods for large Bayesian VARs with stochastic volatility

Joshua Chan, Eric Eisenstat, Chenghan Hou and Gary Koop

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: Adding multivariate stochastic volatility of a flexible form to large Vector Autoregressions (VARs) involving over a hundred variables has proved challenging due to computational considerations and over-parameterization concerns. The existing literature either works with homoskedastic models or smaller models with restrictive forms for the stochastic volatility. In this paper, we develop composite likelihood methods for large VARs with multivariate stochastic volatility. These involve estimating large numbers of parsimonious models and then taking a weighted average across these models. We discuss various schemes for choosing the weights. In our empirical work involving VARs of up to 196 variables, we show that composite likelihood methods have similar properties to existing alternatives used with small data sets in that they estimate the multivariate stochastic volatility in a flexible and realistic manner and they forecast comparably. In very high dimensional VARs, they are computationally feasible where other approaches involving stochastic volatility are not and produce superior forecasts than natural conjugate prior homoscedastic VARs.

Keywords: Bayesian; large VAR; composite likelihood; prediction pools; stochastic volatility (search for similar items in EconPapers)
JEL-codes: C11 C32 C53 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2018-05
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-for and nep-ore
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Citations: View citations in EconPapers (10)

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https://cama.crawford.anu.edu.au/sites/default/fil ... senstat_hou_koop.pdf (application/pdf)

Related works:
Journal Article: Composite likelihood methods for large Bayesian VARs with stochastic volatility (2020)
Working Paper: Composite Likelihood Methods for Large Bayesian VARs with Stochastic Volatility (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2018-26

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