Choosing between Different Time-Varying Volatility Models for Structural Vector Autoregressive Analysis

37 Pages Posted: 11 Jul 2017

See all articles by Helmut Lütkepohl

Helmut Lütkepohl

Free University of Berlin (FUB)

Thore Schlaak

German Institute for Economic Research (DIW Berlin)

Date Written: July 2017

Abstract

The performance of information criteria and tests for residual heteroskedasticity for choosing between different models for time-varying volatility in the context of structural vector autoregressive analysis is investigated. Although it can be difficult to find the true volatility model with the selection criteria, using them is recommended because they can reduce the mean squared error of impulse response estimates substantially relative to a model that is chosen arbitrarily based on the personal preferences of a researcher. Heteroskedasticity tests are found to be useful tools for deciding whether time-varying volatility is present but do not discriminate well between different types of volatility changes. The selection methods are illustrated by specifying a model for the global market for crude oil.

Keywords: Structural Vector Autoregression, Identification via Heteroskedasticity, Conditional Heteroskedasticity, Smooth Transition, Markov Switching, GARCH

JEL Classification: C32

Suggested Citation

Lütkepohl, Helmut and Schlaak, Thore, Choosing between Different Time-Varying Volatility Models for Structural Vector Autoregressive Analysis (July 2017). DIW Berlin Discussion Paper No. 1672, Available at SSRN: https://ssrn.com/abstract=2999653 or http://dx.doi.org/10.2139/ssrn.2999653

Helmut Lütkepohl (Contact Author)

Free University of Berlin (FUB)

Otto Suhr Institut for Political Science\
Ihnestrasse 21
Berlin
Germany

Thore Schlaak

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

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