Qual VAR Revisited: Good Forecast, Bad Story

Makram El-Shagi and Gregor von Schweinitz

No 12/2012, IWH Discussion Papers from Halle Institute for Economic Research (IWH)

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, i.e. a VAR model including a latent variable that governs the behavior of an observable binary variable. While we find that the Qual VAR performs reasonably well in forecasting (outperforming a probit benchmark), there are substantial identification problems. Therefore, when the economic interpretation of the dynamic behavior of the latent variable and the chain of causality matter, the Qual VAR is inadvisable.

Keywords: binary choice model; Gibbs sampling; latent variable; MCMC; method evaluation; Binary-Choice-Modelle; Gibbs-Sampling; latente Variable; MCMC; Methodenevaluation (search for similar items in EconPapers)
JEL-codes: C15 C35 E37 (search for similar items in EconPapers)
Date: 2012
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Journal Article: Qual VAR revisited: Good forecast, bad story (2016)
Journal Article: Qual Var Revisited: Good Forecast, Bad Story (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:iwhdps:iwh-12-12

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