Abstract

http://ssrn.com/abstract=1988686
 
 

References (54)



 
 

Citations (9)



 


 



Prior Selection for Vector Autoregressions


Domenico Giannone


LUISS Guido Carli University; Centre for Economic Policy Research (CEPR); Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES)

Michele Lenza


European Central Bank (ECB)

Giorgio E. Primiceri


Northwestern University - Department of Economics; National Bureau of Economic Research (NBER)

January 2012

CEPR Discussion Paper No. DP8755

Abstract:     
Vector autoregressions (VARs) are flexible time series models that can capture complex dynamic interrelationships among macroeconomic variables. However, their dense parameterization leads to unstable inference and inaccurate out-of-sample forecasts, particularly for models with many variables. A potential solution to this problem is to use informative priors, in order to shrink the richly parameterized unrestricted model towards a parsimonious naïve benchmark, and thus reduce estimation uncertainty. This paper studies the optimal choice of the informativeness of these priors, which we treat as additional parameters, in the spirit of hierarchical modeling. This approach is theoretically grounded, easy to implement, and greatly reduces the number and importance of subjective choices in the setting of the prior. Moreover, it performs very well both in terms of out-of-sample forecasting, and accuracy in the estimation of impulse response functions.

Number of Pages in PDF File: 34

Keywords: Bayesian Methods, Forecasting, Hierarchical Modeling, Impulse Responses, Marginal Likelihood

JEL Classification: C11, C32, C52, E37

working papers series





Date posted: January 20, 2012  

Suggested Citation

Giannone, Domenico and Lenza, Michele and Primiceri, Giorgio E., Prior Selection for Vector Autoregressions (January 2012). CEPR Discussion Paper No. DP8755. Available at SSRN: http://ssrn.com/abstract=1988686

Contact Information

Domenico Giannone (Contact Author)
LUISS Guido Carli University ( email )
Via O. Tommasini 1
Rome, Roma 00100
Italy
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )
Ave. Franklin D Roosevelt, 50 - C.P. 114
Brussels, B-1050
Belgium
+32 2 650 3373 (Phone)
+32 2 650 4475 (Fax)
Michele Lenza
European Central Bank (ECB) ( email )
Kaiserstrasse 29
Frankfurt am Main, D-60311
Germany

Giorgio E. Primiceri
Northwestern University - Department of Economics ( email )
2003 Sheridan Road
Evanston, IL 60208
United States
HOME PAGE: http://faculty.econ.northwestern.edu/faculty/primiceri
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Feedback to SSRN


Paper statistics
Abstract Views: 289
Downloads: 6
References:  54
Citations:  9

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo6 in 1.531 seconds