Adaptive shrinkage in Bayesian vector autoregressive models

Florian Huber and Martin Feldkircher

Department of Economics Working Papers from Vienna University of Economics and Business, Department of Economics

Abstract: Vector autoregressive (VAR) models are frequently used for forecasting and impulse response analysis. For both applications, shrinkage priors can help improving inference. In this paper we derive the shrinkage prior of Griffin et al. (2010) for the VAR case and its relevant conditional posterior distributions. This framework imposes a set of normally distributed priors on the autoregressive coefficients and the covariances of the VAR along with Gamma priors on a set of local and global prior scaling parameters. This prior setup is then generalized by introducing another layer of shrinkage with scaling parameters that push certain regions of the parameter space to zero. A simulation exercise shows that the proposed framework yields more precise estimates of the model parameters and impulse response functions. In addition, a forecasting exercise applied to US data shows that the proposed prior outperforms other specifications in terms of point and density predictions.

Keywords: Normal-Gamma prior; density predictions; hierarchical modeling (search for similar items in EconPapers)
JEL-codes: C11 C30 C53 E52 (search for similar items in EconPapers)
Date: 2016-03
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-for and nep-ore
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Related works:
Journal Article: Adaptive Shrinkage in Bayesian Vector Autoregressive Models (2019)
Working Paper: Adaptive Shrinkage in Bayesian Vector Autoregressive Models (2016)
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