Addressing COVID-19 Outliers in BVARs with Stochastic Volatility

39 Pages Posted: 10 May 2022

See all articles by Andrea Carriero

Andrea Carriero

Queen Mary, University of London; University of Bologna

Todd E. Clark

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Massimiliano Giuseppe Marcellino

Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR)

Elmar Mertens

Deutsche Bundesbank

Multiple version iconThere are 2 versions of this paper

Date Written: 2022

Abstract

The COVID-19 pandemic has led to enormous data movements that strongly affect parameters and forecasts from standard VARs. To address these issues, we propose VAR models with outlier-augmented stochastic volatility (SV) that combine transitory and persistent changes in volatility. The resulting density forecasts are much less sensitive to outliers in the data than standard VARs. Predictive Bayes factors indicate that our outlier-augmented SV model provides the best data fit for the pandemic period, as well as for earlier subsamples of relatively high volatility. In historical forecasting, outlier-augmented SV schemes fare at least as well as a conventional SV model.

Keywords: Bayesian VARs, stochastic volatility, outliers, pandemics, forecasts

JEL Classification: C53, E17, E37, F47

Suggested Citation

Carriero, Andrea and Clark, Todd E. and Marcellino, Massimiliano and Mertens, Elmar, Addressing COVID-19 Outliers in BVARs with Stochastic Volatility (2022). Deutsche Bundesbank Discussion Paper No. 13/2022, Available at SSRN: https://ssrn.com/abstract=4103625 or http://dx.doi.org/10.2139/ssrn.4103625

Andrea Carriero (Contact Author)

Queen Mary, University of London ( email )

Mile End Road
London, London E1 4NS
United Kingdom

University of Bologna ( email )

Piazza Scaravilli 2
Bologna, 40100
Italy

Todd E. Clark

Federal Reserve Banks - Federal Reserve Bank of Cleveland

East 6th & Superior
Cleveland, OH 44101-1387
United States

Massimiliano Marcellino

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Elmar Mertens

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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