Scribd
Upload
11 views25 pages

Steructural VAR Part 1

Uploaded by

Waqas Anjum IYl
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
11 views25 pages

Steructural VAR Part 1

Uploaded by

Waqas Anjum IYl
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 25

Structural

Structural VAR
VAR Part
Part 11
Zahid
Zahid Asghar,
Asghar, Professor,
Professor, School
School of
of Economics,
Economics,
QAU
QAU
03-12-2023
:
Introduction
Del Negro and Schorfheide (2011):

At first glance, VARs appear to be straightforward multivariate generalizations of


univariate autoregressive models. At second sight, they turn out to be one of the
key empirical tools in modern macroeconomics.
:
What are VARs ?
multivariate linear time-series models
endogenous variable in the system are functions of lagged values of all endogenous
variables
simple and flexible alternative to the traditional multiple-equations models
:
Historical Overview : Sims’ Critique
In the 1980s criticized the large-scale macro-econometric models of the time
Proposed VARs as an alternative that allowed one to model macroeconomic data
informatively
:
What Are VARs Used For?
F ORECASTING

Reduced Form VARs

S TRUCUTURAL A NALYSIS

Structural VARs
:
Unit Plan/Roadmap

VAR models roadmap


:
Estimation of VARs
:
Introduction to VARs
Let yt be a vector with the value of n variables at time t:

yt = [y1,t y2,t . . . yn,t ]′


A p-order vector autoregressive process generalize a one-variable AR(p) process to n
variables:

yt = G0 + G1 yt−1 + G2 yt−2 +. . . +Gp yt − p + et Reduced Form VAR


G0 = (n.1) vector of constraints G0 = (n. n)
vector of coe!cients et = (n.1) vector of white
noise innovations
E[et ] = 0
E[et e′τ = Ω, ift = τ
0otherwise
:
Example : A VAR(1) in 2 Variables
y1,t = g11 y1,t + g12 y2,t + e1,t
y2,t = g21 y1,t + g22 y2,t + e2,t
yt = Gt yt−1 + et where
yt = [ ]
y1,t
y2,t
yt = [ ]
πt
gdpt
Gt = [ ]
g11 g12
g21 g22
Gt = [ ]
e1,t
e2,t
, Assumptions about the error terms:
0 0
E[et e′t ] = [ ] = Ω, fort ≠ τ
0 0
2
σe1 σe1e2
E[et et ] = [
′
2
]=Ω
σe1e2 σe2
:
Estimation: by OLS
Performed with OLS applied equation by equation
Estimates are:
consistent
e!cient
equivalent to GLS
:
General Specifications Choices
Selection of variables to be included: in accordance with economic theory, empirical
evidence and/or experience
Exogenous variables can be included: constant, time trends, other additional
explanators
Non-stationary level data is often transformed (log levels, log di"erences, growth
rates, etc.)
The model should be parsimonious
:
Stationary VARs
:
Stationarity of a VAR : Definition
A p-th order VAR is said to be covariance-stationary if :
1. The expected value of yt does not depend on timed

⎡ µ1 ⎤
E[Yt ] = E[Yt+j ] = µ = ⎢
µ2 ⎥
⎢ ⎥
⎢…⎥
⎣µ ⎦
n
2. The covariance matrix of yt and yt+j depends on the time lapsed between j and not
not the reference period t
E[(yt − µ)(yt+j − µ)′ ] = E[(ys − µ)(ys+j − µ)′ ] = Γj
:
Condions for Sationarity
The conditioins for a VAR to be stationary are similar to the conditions for a
univariate AR process to be stationary:
yt = G0 + G1 yt−1 + G2 yt−2 + ⋯ + Gp yt−p + et
(In − G1 L − G2 L2 − ⋯ − Gp Lp )yt = G0 + et
G(L)yt = G0 + et For yt to be stationary, the matrix polynomial in the lag operator
G(L) must be invertible.
:
Conditions for Stationarity
A VAR(p) process is stationary (thus) - A
VAR(p) if all the np roots of the characteristic
polynomial are (in modulus) outside the unit
imaginary
det(In − G1 L − G2 L2 − ⋯ − Gp Lp ) = 0
Softwares sometimes inverse roots of the
characteristic AR polynomial, which should
then lie within the unit imaginary circle.

Unit root circle


:
Vector Moving Average Representation of a VAR
If a VAR is stationary, the yt vector can be expressed as a sum of all of the past white
noise shocks et (VMA(∞) representation yt = µ + G(L)−1 et , where
µ = G(L)−1 G0 yt = µ + (In + Ψ1 L + ΨL2 + …)et
yt = µ + et + Ψe_t − 1 + Ψe_t − 2 + …

yt = µ + ∑ni=1 Ψi et−i
where Ψi is a (n x n) matrix of coe!cients, and Ψ0 is the identity matrix.
From the VMA(∞ ) representation it is possible to obtain impulse response functions
:
Lag Specification Criteria
:
Lags Needed for the VAR
What number is most appropriate? …
If p is extremely short, the model may be poorly specified
If p is extremely long, too many degrees of freedom will be lost
The number of lags should be su!cient for the residuals from the estimation to
constitute individual white noises
:
The Curse of Dimensionality
VAR S ARE VERY DENSELY PARAMETERIZED
In a VAR(p) we have p matrices of dimension nxn : G1 , . . . , Gp
Assume G0 is an intercept vector (dimension: nx1)
The number of total coe!cients/parameters to be estimated as : $n+n.n.p=n(1+np)
:
Overfitting versus Omitted Variable Bias
Over-fitting: poor-quality estimates and bad forecasts
Omitted variable bias: poor-quality estimates and bad forecasts
Possible solutions:
Core VAR plues rotating variables
Bayesian Analysis
:
Lag
Lag Selection
Selection Criteria
Criteria
As for univariate models, one can use multidimensional versions of
AIC, BIC, HQ, etc.
Information-based criteria : trade-o" between goodness of fit (reduction in Sum of
Squares) and parsimony
:
Lag
Lag Specification:
Specification: Practitioner’s
Practitioner’s Advice
Advice
p=4 when working with quarterly data
p=12 with monthly data
The e"ective constraint is np<T/3
Example: T=100, nle7, p=4
:
Forecasting
Forecasting using
using VARs
VARs
:
Forecasting
Forecasting using
using the
the Estimated
Estimated VAR
VAR
Let Yt−1 be a matrix containing all information available up to time t (before
realization of et are known)
Then: E[yt /Yt−1 ] = G0 + G1 yt−1 + G2 yt−2 + ⋯ + Gp yt−p

The forecast error can be decomposed into the sum of et , the unexpected innovation
of yt , and the coe!cient estimation error:
yt − E[yt /Yt−1 ] = et + V (Yt−1 ])
If the estimator of the coe!cients is consistent and estimates, are based on many data
observations, the coe!cient estimation error tends to be small, and :

Yt − E[yt /Yt−1 ] ≅ et
:
Iterated
Iterated Forecasts
Forecasts
Iterating one period forward:
E[yt+1 /Yt−1 ] = G0 + G1 E[yt |yt−1 ] + G2 yt−2 + ⋯ + Gp yt−p+1
Iterating j periods forward:
E[yt+j /Yt−1 ] = G0 + G1 E[yt+j−1 |yt−1 ] + G2 E[yt+j−2 |yt−1 + ⋯ + Gp yt−p+1
:

You might also like