Bayesian Forecast Combination for VAR Models

58 Pages Posted: 20 Dec 2007

See all articles by Michael Andersson

Michael Andersson

Finansinspektionen

Sune Karlsson

University of Orebro - Department of Economics

Date Written: November 22, 2007

Abstract

We consider forecast combination and, indirectly, model selection for VAR models when there is uncertainty about which variables to include in the model in addition to the forecast variables. The key difference from traditional Bayesian variable selection is that we also allow for uncertainty regarding which endogenous variables to include in the model. That is, all models include the forecast variables, but may otherwise have differing sets of endogenous variables. This is a difficult problem to tackle with a traditional Bayesian approach. Our solution is to focus on the forecasting performance for the variables of interest and we construct model weights from the predictive likelihood of the forecast variables. The procedure is evaluated in a small simulation study and found to perform competitively in applications to real world data.

Keywords: Bayesian model averaging, Predictive likelihood, GDP forecasts

JEL Classification: C11, C15, C32, C52, C53

Suggested Citation

Andersson, Michael and Karlsson, Sune, Bayesian Forecast Combination for VAR Models (November 22, 2007). Riksbank Research Paper No. 216, Available at SSRN: https://ssrn.com/abstract=1077537 or http://dx.doi.org/10.2139/ssrn.1077537

Michael Andersson (Contact Author)

Finansinspektionen ( email )

Box 7821
Brunnsgatan 3
Stockholm
Sweden

Sune Karlsson

University of Orebro - Department of Economics ( email )

SE-70182 Orebro
Sweden
+46 19 301 257 (Phone)

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