Scandinavian Working Papers in Economics

Working Papers,
Örebro University, School of Business

No 2024:8: VAR Models with Fat Tails and Dynamic Asymmetry

Tamás Kiss (), Stepan Mazur (), Hoang Nguyen () and Pär Österholm ()
Additional contact information
Tamás Kiss: Örebro University School of Business, Postal: Örebro University, School of Business, SE - 701 82 ÖREBRO, Sweden
Stepan Mazur: Örebro University School of Business, Postal: Örebro University, School of Business, SE - 701 82 ÖREBRO, Sweden
Hoang Nguyen: Linköping University, Postal: Linköping University, SE-581 83 Linköping, Sweden
Pär Österholm: Örebro University School of Business, Postal: Örebro University, School of Business, SE - 701 82 ÖREBRO, Sweden

Abstract: In this paper, we extend the standard Gaussian stochastic-volatility Bayesian VAR by employing the generalized hyperbolic skew Student’s t distribution for the innovations. Allowing the skewness parameter to vary over time, our specification permits flexible modelling of innovations in terms of both fat tails and – potentially dynamic – asymmetry. In an empirical application using US data on industrial production, consumer prices and economic policy uncertainty, we find support – although to a moderate extent – for time-varying skewness. In addition, we find that shocks to economic policy uncertainty have a negative effect on both industrial production growth and CPI inflation.

Keywords: Bayesian VAR; Generalized hyperbolic skew Students’s t distribution; Stochastic volatility; Economic policy uncertainty

JEL-codes: C11; C32; C52; E44; E47; G17

Language: English

28 pages, October 9, 2024

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