Large Time-Varying Parameter VARs: A Non-Parametric Approach

57 Pages Posted: 10 Oct 2016

See all articles by George Kapetanios

George Kapetanios

King's College, London

Massimiliano Giuseppe Marcellino

European University Institute; European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS); Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR)

Fabrizio Venditti

Bank of Italy

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Date Written: October 2016

Abstract

In this paper we introduce a nonparametric estimation method for a large Vector Autoregression (VAR) with time-varying parameters. The estimators and their asymptotic distributions are available in closed form. This makes the method computationally efficient and capable of handling information sets as large as those typically handled by factor models and Factor Augmented VARs (FAVAR). When applied to the problem of forecasting key macroeconomic variables, the method outperforms constant parameter benchmarks and large (parametric) Bayesian VARs with time-varying parameters. The tool can also be used for structural analysis. As an example, we study the time-varying effects of oil price innovations on sectoral U.S. industrial output. We find that the changing interaction between unexpected oil price increases and business cycle fluctuations is shaped by the durable materials sector, rather by the automotive sector on which a large part of the literature has typically focused.

Suggested Citation

Kapetanios, George and Marcellino, Massimiliano and Venditti, Fabrizio, Large Time-Varying Parameter VARs: A Non-Parametric Approach (October 2016). CEPR Discussion Paper No. DP11560, Available at SSRN: https://ssrn.com/abstract=2850402

George Kapetanios (Contact Author)

King's College, London ( email )

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Massimiliano Marcellino

European University Institute ( email )

Villa Schifanoia
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Italy

European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS) ( email )

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Florence, Florence 50014
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Bocconi University - Department of Economics ( email )

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Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Fabrizio Venditti

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

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