Adapting the Litterman Prior for Cointegrated VARs

EUI Working Papers, ECO 2011/14

38 Pages Posted: 18 Mar 2015

See all articles by Michal Markun

Michal Markun

National Bank of Poland; Cardinal Stefan Wyszynski University

Date Written: July 1, 2011

Abstract

The paper presents a novel prior for Bayesian VAR models, characterized by explicit modelling of cointegration that avoids certain unattractive restrictive properties of the priors used previously. The potential of the prior for easy elicitation from the well-established Litterman beliefs is demonstrated. An efficient procedure for sampling from posterior distribution is provided. The favourable outcome of the forecast comparison exercise gives further support for the use of the methods proposed.

Suggested Citation

Markun, Michal, Adapting the Litterman Prior for Cointegrated VARs (July 1, 2011). EUI Working Papers, ECO 2011/14, Available at SSRN: https://ssrn.com/abstract=2579623 or http://dx.doi.org/10.2139/ssrn.2579623

Michal Markun (Contact Author)

National Bank of Poland ( email )

00-919 Warsaw
Poland

Cardinal Stefan Wyszynski University ( email )

01-815 Warsaw
Poland

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