Conferences at Department of Economics, University of Toronto, RCEF 2012: Cities, Open Economies, and Public Policy

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Model averaging and variable selection in VAR-models

Shutong Ding, Sune Karlsson

Last modified: 2012-08-14


Bayesian model averaging and model selection is based on the marginal likelihoods of the competing models. This can, however, not be used directly in VAR models when one of the issues is which - and how many - variables to include in the model since the likelihoods will be for different groups of variables and not directly comparable. One possible solution is to consider the marginal likelihood for a core subset of variables that are always included in the model. This is similar in spirit to a recent proposal for forecast combination based on the predictive likelihood. The two approaches are contrasted and their performance is evaluated in a simulation study and a forecasting exercise.

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