Bayesian Compressed Vector Autoregressions
35 Pages Posted: 26 Mar 2016 Last revised: 6 Jun 2017
Date Written: June 5, 2017
Macroeconomists are increasingly working with large Vector Autoregressions (VARs) where the number of parameters vastly exceeds the number of observations. Existing approaches either involve prior shrinkage or the use of factor methods. In this paper, we develop an alternative based on ideas from the compressed regression literature. It involves randomly compressing the explanatory variables prior to analysis. A huge dimensional problem is thus turned into a much smaller, more computationally tractable one. Bayesian model averaging can be done over various compressions, attaching greater weight to compressions which forecast well. In a macroeconomic application involving up to 129 variables, we find compressed VAR methods to forecast better than either factor methods or large VAR methods involving prior shrinkage.
Keywords: multivariate time series, random projection, forecasting
JEL Classification: C11, C32, C53
Suggested Citation: Suggested Citation