Scandinavian Working Papers in Economics

Working Papers,
Örebro University, School of Business

No 2007:13: Bayesian Forecast Combination for VAR Models

Michael K Andersson () and Sune Karlsson ()
Additional contact information
Michael K Andersson: Department of Business, Economics, Statistics and Informatics, Postal: Örebro University, Department of Business, Economics, Statistics and Informatics, SE - 701 82 ÖREBRO, Sweden
Sune Karlsson: Department of Business, Economics, Statistics and Informatics, Postal: Örebro University, Department of Business, Economics, Statistics and Informatics, SE - 701 82 ÖREBRO, Sweden

Abstract: We consider forecast combination and, indirectly, model selection for VAR models when there is uncertainty about which variables to include in the model in addition to the forecast variables. The key di erence from traditional Bayesian variable selection is that we also allow for uncertainty regarding which endogenous variables to include in the model. That is, all models include the forecast variables, but may otherwise have di ering sets of endogenous variables. This is a dicult problem to tackle with a traditional Bayesian approach. Our solution is to focus on the forecasting performance for the variables of interest and we construct model weights from the predictive likelihood of the forecast variables. The procedure is evaluated in a small simulation study and found to perform competitively in applications to real world data.

Keywords: Bayesian model averaging; Predictive likelihood; GDP forecasts

JEL-codes: C11; C15; C32; C52; C53

52 pages, December 13, 2007

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