Large Vector Autoregressions with Stochastic Volatility and Flexible Priors

55 Pages Posted: 18 Sep 2016

See all articles by Andrea Carriero

Andrea Carriero

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research

Todd E. Clark

Federal Reserve Bank of Cleveland

Massimiliano Giuseppe Marcellino

Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: June 30, 2016

Abstract

Recent research has shown that a reliable vector autoregressive model (VAR) for forecasting and structural analysis of macroeconomic data requires a large set of variables and modeling time variation in their volatilities. Yet, there are no papers jointly allowing for stochastic volatilities and large datasets, due to computational complexity. Moreover, homoskedastic VAR models for large datasets so far restrict substantially the allowed prior distributions on the parameters. In this paper we propose a new Bayesian estimation procedure for (possibly very large) VARs featuring time varying volatilities and general priors. This is important both for reduced form applications, such as forecasting, and for more structural applications, such as computing response functions to structural shocks. We show that indeed empirically the new estimation procedure performs very well for both tasks.

JEL Classification: C11, C13, C33, C53

Suggested Citation

Carriero, Andrea and Clark, Todd E. and Marcellino, Massimiliano, Large Vector Autoregressions with Stochastic Volatility and Flexible Priors (June 30, 2016). FRB of Cleveland Working Paper No. 16-17, Available at SSRN: https://ssrn.com/abstract=2840014

Andrea Carriero

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Via Roentgen 1
Milan, 20136
Italy
(39 02) 5836 3300 (Phone)
(39 02) 5836 3302 (Fax)

Todd E. Clark (Contact Author)

Federal Reserve Bank of Cleveland ( email )

P.O. Box 6387
Cleveland, OH 44101
United States
216-579-2015 (Phone)

Massimiliano Marcellino

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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