Adapting the Litterman Prior for Cointegrated VARs
EUI Working Papers, ECO 2011/14
38 Pages Posted: 18 Mar 2015
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: 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
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