Model Uncertainty in Panel Vector Autoregressive Models

25 Pages Posted: 28 Aug 2014

See all articles by Gary Koop

Gary Koop

University of Strathclyde, Glasgow - Strathclyde Business School - Department of Economics

Dimitris Korobilis

University of Glasgow - Adam Smith Business School

Date Written: August 1, 2014

Abstract

We develop methods for Bayesian model averaging (BMA) or selection (BMS) in Panel Vector Autoregressions (PVARs). Our approach allows us to select between or average over all possible combinations of restricted PVARs where the restrictions involve interdependencies between and heterogeneities across cross-sectional units. The resulting BMA framework can find a parsimonious PVAR specification, thus dealing with overparameterization concerns. We use these methods in an application involving the euro area sovereign debt crisis and show that our methods perform better than alternatives. Our findings contradict a simple view of the sovereign debt crisis which divides the euro zone into groups of core and peripheral countries and worries about financial contagion within the latter group.

Keywords: Bayesian model averaging, stochastic search variable selection, financial contagion, sovereign debt crisis

JEL Classification: C11, C33, C52, G10

Suggested Citation

Koop, Gary and Korobilis, Dimitris, Model Uncertainty in Panel Vector Autoregressive Models (August 1, 2014). Available at SSRN: https://ssrn.com/abstract=2487540 or http://dx.doi.org/10.2139/ssrn.2487540

Gary Koop

University of Strathclyde, Glasgow - Strathclyde Business School - Department of Economics ( email )

100 Cathedral Street
Glasgow G4 0LN
United Kingdom

Dimitris Korobilis (Contact Author)

University of Glasgow - Adam Smith Business School ( email )

40 University Avenue
Gilbert Scott Building
Glasgow, Scotland G12 8QQ
United Kingdom

HOME PAGE: http://https://sites.google.com/site/dimitriskorobilis/

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