VAR Models - tau.ac.il.pptVIP

VAR Models Yankun Wang, Cornell University, Oct 2009 What is VAR? A var (p) model is: with and Originally proposed by Sims (1980) Efficient way of summarizing information contained in the data Useful for forecasting Conduct economically interesting analysis under meaningful identification restrictions Outline: Reduced form VAR Wold Theorem Specification Estimation Presentation of Results Structural VAR Identification Potential extension to “Evaluation of Currency Regimes: the Unique Role of Sudden Stops”by Assaf Razin and Yona Rubinstein The Wold Theorem Wold Theorem: Every stationary process can be written as the sum of two components: a deterministic part and an MA(∞) part. As a result: Every stationary process can be written as a VAR process of infinite order. Potential Problem: In reality, we can only deal with finite order. Specification What is the appropriate lag length in the VAR? Three criterions: Akaike information criterion (AIC) Schwarz criterion (SIC) Hannan-Quinn criterion (HQC) ( all functions of m, T, and variance-covariance matrix) In practice: Fix an upper bound of lag length q (12), choose the q which minimizes one of the information criterion AIC is inconsistent For T20, SIC and HQC will always choose smaller models than AIC Estimation Multivariate GLS estimates are the same as equation by equation OLS estimates. For unrestricted VAR models: ML estimates and equation by equation OLS estimates coincide. When a VAR is estimated under some restrictions, ML estimates are different from OLS estimates; ML estimates are consistent and efficient if the restrictions are true. Presentation of Results It is rare to report estimated VAR coefficients. Instead: Impulse responses Forecast error variance decomposition: assess the relative contribution of different shocks to fluctuations in varables Historical Decomposition: given the path of one specific shock, how will the variables evolve? Structural VARs