BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 13/2015:
Real-time forecasting with a MIDAS VAR
Heiner Mikosch ()
and Stefan Neuwirth ()
Abstract: This paper presents a MIDAS type mixed frequency VAR
forecasting model. First, we propose a general and compact mixed frequency
VAR framework using a stacked vector approach. Second, we integrate the
mixed frequency VAR with a MIDAS type Almon lag polynomial scheme which is
designed to reduce the parameter space while keeping models fexible. We
show how to recast the resulting non-linear MIDAS type mixed frequency VAR
into a linear equation system that can be easily estimated. A pseudo
out-of-sample forecasting exercise with US real-time data yields that the
mixed frequency VAR substantially improves predictive accuracy upon a
standard VAR for dierent VAR specications. Forecast errors for, e.g., GDP
growth decrease by 30 to 60 percent for forecast horizons up to six months
and by around 20 percent for a forecast horizon of one year.
Keywords: Forecasting; mixed frequency data; MIDAS; VAR; real time; (follow links to similar papers)
JEL-Codes: C53; E27; (follow links to similar papers)
34 pages, April 13, 2015
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