Adaptive Shrinkage in Bayesian Vector Autoregressive Models

Martin Feldkircher, Florian Huber

Publication: Working/Discussion PaperWU Working Paper

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Abstract

Vector autoregressive (VAR) models are frequently used for forecasting and impulse response analysis. For both applications, shrinkage priors can help improving inference. In this paper we derive the shrinkage prior of Griffin et al. (2010) for the VAR case and its relevant conditional posterior distributions. This
framework imposes a set of normally distributed priors on the autoregressive coefficients and the covariances of the VAR along with Gamma priors on a set of local and global prior scaling parameters. This prior setup is then generalized by introducing another layer of shrinkage with scaling parameters that push certain regions of the parameter space to zero. A simulation exercise shows that the proposed framework yields more precise estimates of the model parameters and impulse response functions. In addition, a forecasting exercise applied to US data shows that the proposed prior outperforms other specifications in terms of point and density predictions. (authors' abstract)
Original languageEnglish
Place of PublicationVienna
PublisherWU Vienna University of Economics and Business
Publication statusPublished - 1 Mar 2016

Publication series

NameDepartment of Economics Working Paper Series
No.221

WU Working Paper Series

  • Department of Economics Working Paper Series

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