An Introduction To Bayesian VAR (BVAR) Models R-Econometrics

05.03.
2021 An Introduct on to Bayes an VAR (BVAR) Models · r-econometr cs
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An Introduction to Bayesian VAR (BVAR) Models

with tags r bvar var bayes bayesian-var bvartools gibbs-sampler - Franz X. Mohr, July 7, 2019
BVAR models
Bayesian VAR (BVAR) models have the same mathematical form as any other VAR model, i.e.
p
yt = c + ∑ A i yt−i + ϵt ,
l=i
where yt is a K × 1 vector of endogenous variables in period t, Ai is the co cient matrix

corresponding to the ith lag of yt , c is a constant deterministic term and ϵ is an error term with zero
mean and variance-covariance Σ .
The only di erence between usual VAR models and BVAR models is the way parameter estimates are
obtained and interpreted. VAR models are usually estimated by OLS, which is a simple and
computationally fast estimator. By contrast, Bayesian estimators are slightly more complicated and
more burdensome in terms of algebra and calculation power. The coe cients obtained by so-called
frequentist estimators like OLS are interpreted based on the concept of the sampling distribution. In
Bayesian inference, the coe cients are assumed to have their own distribution. A more detailed
treatment of the di erence between frequentist and Bayesian inference can be found in Kennedy
(2008, ch. 14), which provides a short introduction to the Bayesian approach and a series of
references for interested readers. Koop and Korobilis (2010) provide a very good introduction to
Bayesian VAR estimators.
As already mentioned, Bayesian inference can be algebraically demanding. However, Bayesian

estimators for linear VAR models can be implemented in a straightforward manner. A standard
implementation is a so-called Gibbs sampler, which belongs to the family of Markov-Chain-Monte-
Carlo (MCMC) methods. A detailed treatment of this method is beyond the scope of this post, but
Wikipedia might be a good start to become familiar with it. Personally, I like to think of the Gibbs
sampler as throwing a bunch of random numbers at a model and see what sticks. The remainer of
this text provides the code to set up and estimate a basic BVAR model with the bvartools package.
Model and data

For this illustration the dataset E1 from Lütkepohl (2007) is used. It contains data on West German
xed investment, disposable income and consumption expenditures in billions of DM from 1960Q1
https://www.r-econometr cs.com/t meser es/bvar/ 1/16

05.03.2021 An Introduct on to Bayes an VAR (BVAR) Models · r-econometr cs
to 1982Q4. Following Lütkepohl (2007) the VAR model has two lags, i.e. p = 2 and only the rst 73
observations are used for inference.
library(bvartools)
data("e1") # Load the data

e1 <- diff(log(e1)) # Calculate first-log-differences
# Reduce number of oberservations

e1 <- window(e1, end = c(1978, 4))
Basically, it would be possible to proceed without any further transformation of the data. However, it
is good practise to multiply log-di erenced data by 100 so that, for example, the value 1% is
indicated by 1 and not by 0.01.
e1 <- e1 * 100 # Rescale data
plot(e1) # Plot the series
To assist with the set-up of the model the gen_var function produces the inputs y and x for the
estimator, where y is a matrix of dependent variables and x is the matrix of regressors for the model
yt = Axt + ut ,
with ut ∼ N (0, Σ). This is a more compact form of the model above, where the lags of the
endogenous variables and the constant are already included in xt .

data <- gen_var(e1, p = 2, deterministic = "const")
y <- t(data$data$Y)
x <- t(data$data$Z)
Estimation
Frequentist estimator
We calculate frequentist VAR estimates using the standard formula yx′ (xx′ )−1 to obtain a
benchmark for the Bayesian estimator. The parameters are obtained by OLS:
A_freq <- tcrossprod(y, x) %*% solve(tcrossprod(x)) # Calculate estimates

round(A_freq, 3) # Round estimates and print
## invest.1 income.1 cons.1 invest.2 income.2 cons.2 const

## invest -0.320 0.146 0.961 -0.161 0.115 0.934 -1.672
## income 0.044 -0.153 0.289 0.050 0.019 -0.010 1.577
## cons -0.002 0.225 -0.264 0.034 0.355 -0.022 1.293
And Σ is calculated by
u_freq <- y - A_freq %*% x

u_sigma_freq <- tcrossprod(u_freq) / (ncol(y) - nrow(x))
round(u_sigma_freq, 2)
## invest income cons

## invest 21.30 0.72 1.23
## income 0.72 1.37 0.61
## cons 1.23 0.61 0.89
These are virtually the same values as in Lütkepohl (2007, Ch. 3). The only di erences stem from the
re-scaling of the data above, which results in proportionally higher values for the const variable and
does not require us to multiply the covariance matrix by 104 .
Bayesian estimator

The following code is a Gibbs sampler for a simple VAR model with non-informative priors. First, we
de ne some variables, which help in the set-up of the sampler:
# Reset random number generator for reproducibility

set.seed(1234567)
iter <- 30000 # Number of iterations of the Gibbs sampler

burnin <- 15000 # Number of burn-in draws
store <- iter - burnin
tt <- ncol(y) # Number of observations

k <- nrow(y) # Number of endogenous variables
m <- k * nrow(x) # Number of estimated coefficients
Next, we set the priors. The prior means of the coe cient vector a = vec(A) are set to 0 and the
diagonal elements of the corresponding covariance matrix V are set to 1, except for coe cients
corresponding to intercept terms, which are set to 10. The prior degrees of freedom of the error
term are set to 6 and the diagonal elements of the scale matrix to 1.
Note that the choice of the prior variances for coe cients, which correspond to intercept terms, can
be motivated by the values of the analysed time series. For example, if a stationary series seems to
move around the value 5, this could be taken into account by setting the prior mean of the
respective coe cients to 5 with a small prior variance around it. If the researcher still prefers to set
the mean to 0, it should be ensured that the prior variance is large enough so that the value 5 is
captured by the prior distribution.
Note that the choice of the prior variances of the errors can be highly in uential if the scale of the
errors is not taken into account appropriately. For example, if the dependent variable does exceed
values between −0.1 and 0.1, a prior of 1 would be too high and could lead to useless results.
# Set priors
a_mu_prior <- matrix(0, m) # Vector of prior parameter means
a_v_i_prior <- diag(1, m) # Inverse of the prior covariance matrix
u_sigma_df_prior <- 6 # Prior degrees of freedom

u_sigma_scale_prior <- diag(1, k) # Prior covariance matrix
u_sigma_df_post <- tt + u_sigma_df_prior # Posterior degrees of freedom
Note that we could also use uninformative priors, where all elements of the inverse prior covariance
matrix V −1 are set to zero and the prior degrees of freedom and the elements of the scale matrix
are set to 0 as well. Such a speci cation should lead to posterior draws, which mimic the results of a
frequentist OLS estimator.
Then we obtain some starting values. It might be a good idea to start with the OLS estimates of the
model.

# Initial values
u_sigma_i <- solve(u_sigma_freq)
Next, create object, in which the posterior draws are saved for later.
# Data containers for posterior draws

draws_a <- matrix(NA, m, store)
draws_sigma <- matrix(NA, k * k, store)
Finally run the Gibbs sampler.
# Start Gibbs sampler

for (draw in 1:iter) {
# Draw conditional mean parameters
a <- post_normal(y, x, u_sigma_i, a_mu_prior, a_v_i_prior)
# Draw variance-covariance matrix

u <- y - matrix(a, k) %*% x # Obtain residuals
u_sigma_scale_post <- solve(u_sigma_scale_prior + tcrossprod(u))
u_sigma_i <- matrix(rWishart(1, u_sigma_df_post, u_sigma_scale_post)[,, 1], k)
u_sigma <- solve(u_sigma_i) # Invert Sigma_i to obtain Sigma
# Store draws
if (draw > burnin) {
draws_a[, draw - burnin] <- a
draws_sigma[, draw - burnin] <- u_sigma
}
}
After the Gibbs sampler has nished, point estimates for the coe cient matrix can be obtained as,
e.g., the mean of the posterior draws:
A <- rowMeans(draws_a) # Obtain means for every row

A <- matrix(A, k) # Transform mean vector into a matrix
A <- round(A, 3) # Round values
dimnames(A) <- list(dimnames(y)[[1]], dimnames(x)[[1]]) # Rename matrix dimensions
A # Print

## invest.1 income.1 cons.1 invest.2 income.2 cons.2 const

## invest -0.284 0.200 0.573 -0.141 0.170 0.540 -0.353
## income 0.041 -0.132 0.327 0.048 0.036 0.035 1.307
## cons -0.003 0.237 -0.244 0.033 0.365 0.000 1.145
Point estimates for the covariance matrix can also be obtained by calculating the means of the
posterior draws.
Sigma <- rowMeans(draws_sigma) # Obtain means for every row

Sigma <- matrix(Sigma, k) # Transform mean vector into a matrix
Sigma <- round(Sigma, 2) # Round values
dimnames(Sigma) <- list(dimnames(y)[[1]], dimnames(y)[[1]]) # Rename matrix dimensi
Sigma # Print
## invest income cons

## invest 20.45 0.64 1.15
## income 0.64 1.35 0.59
## cons 1.15 0.59 0.88
The means of the coe cient draws are relatively close to the results of the frequentist estimatior.
However, note that the frequentist estimator suggests coe cients, which are close to 1 for the
relationship between investment and consumption. By contrast, the Bayesian estimator implies
di erent point estimates, which might be a result of the rather close prior variance of 1 for those
parameters. As mentioned above, using a non-informative prior will lead to results that are closer to
the OLS estimates.
bvar objects
The bvar function can be used to collect relevant output of the Gibbs sampler into a standardised
object, which can be used by further functions such as predict to obtain forecasts or irf for
impulse respons analysis.
bvar_est <- bvar(y = data$data$Y, x = data$data$Z, A = draws_a[1:18,],

C = draws_a[19:21, ], Sigma = draws_sigma)
There is also a summary function, which calculates some summary statistics
summary(bvar_est)

##
## Model:
##
## y ~ invest.1 + income.1 + cons.1 + invest.2 + income.2 + cons.2 + const
##
## Variable: invest
##
## Mean SD Naive SD Time-series SD 2.5% 50% 97.5%
## invest.1 -0.2844 0.1201 0.0009808 0.0009808 -0.5211 -0.2840 -0.04532
## income.1 0.2002 0.4413 0.0036029 0.0035232 -0.6628 0.2007 1.05986
## cons.1 0.5730 0.4895 0.0039965 0.0039965 -0.3833 0.5736 1.52662
## invest.2 -0.1412 0.1213 0.0009908 0.0009746 -0.3800 -0.1424 0.09921
## income.2 0.1704 0.4332 0.0035367 0.0035367 -0.6717 0.1682 1.01781
## cons.2 0.5397 0.4883 0.0039868 0.0039868 -0.4246 0.5369 1.49972
## const -0.3535 0.8423 0.0068772 0.0068772 -1.9975 -0.3569 1.29657
##
## Variable: income
##
## invest.1 0.04132 0.03153 0.0002575 0.0002455 -0.02041 0.04137 0.1027
## income.1 -0.13168 0.13447 0.0010980 0.0010936 -0.39691 -0.13156 0.1344
## cons.1 0.32719 0.15914 0.0012994 0.0012980 0.01486 0.32633 0.6412
## invest.2 0.04820 0.03159 0.0002579 0.0002579 -0.01474 0.04822 0.1110
## income.2 0.03612 0.13057 0.0010661 0.0010699 -0.22046 0.03603 0.2928
## cons.2 0.03473 0.16004 0.0013067 0.0013039 -0.27911 0.03425 0.3481
## const 1.30700 0.38809 0.0031687 0.0031687 0.54084 1.30723 2.0596
##
## Variable: cons
##
## Mean SD Naive SD Time-series SD 2.5% 50%
## invest.1 -0.0032834 0.02548 0.0002080 0.0002080 -0.05363 -0.0032451
## income.1 0.2366413 0.10776 0.0008799 0.0008932 0.02461 0.2361275
## cons.1 -0.2440363 0.12810 0.0010459 0.0010631 -0.49374 -0.2447420
## invest.2 0.0332773 0.02532 0.0002067 0.0002067 -0.01658 0.0334376
## income.2 0.3653053 0.10428 0.0008515 0.0008515 0.16126 0.3653724
## cons.2 0.0003121 0.12840 0.0010484 0.0010484 -0.25214 -0.0007522
## const 1.1448477 0.31103 0.0025396 0.0025396 0.52840 1.1449082
## 97.5%
## invest.1 0.046427
## income.1 0.446671
## cons.1 0.005891
## invest.2 0.082497
## income.2 0.572533
## cons.2 0.251092
## const 1.755069
##
## Variance-covariance matrix:
##
## invest_invest 20.4491 3.5030 0.028602 0.030332 14.6936 20.0350 28.3671
## invest_income 0.6355 0.6416 0.005239 0.005635 -0.5924 0.6194 1.9571
## invest_cons 1.1484 0.5294 0.004323 0.004630 0.1991 1.1213 2.2745
## income_invest 0.6355 0.6416 0.005239 0.005635 -0.5924 0.6194 1.9571
_
## income_income 1.3486 0.2357 0.001925 0.002131 0.9656 1.3221 1.8823
## income_cons 0.5947 0.1516 0.001238 0.001359 0.3383 0.5815 0.9311
## cons_invest 1.1484 0.5294 0.004323 0.004630 0.1991 1.1213 2.2745
## cons_income 0.5947 0.1516 0.001238 0.001359 0.3383 0.5815 0.9311
## cons_cons 0.8770 0.1527 0.001246 0.001382 0.6252 0.8609 1.2227
Posterior draws can be thinned with the function thin:
bvar_est <- thin_posterior(bvar_est, thin = 15)
Forecasts
Forecasts with credible bands can be obtained with the function predict. If the model contains
deterministic terms, new values can be provided in the argument new_d. If no values are provided,
the function sets them to zero. The number of rows of new_d must be the same as the argument
n.ahead.
bvar_pred <- predict(bvar_est, n.ahead = 10, new_d = rep(1, 10))
plot(bvar_pred)
Impulse response analysis

Currently, bvartools supports forecast error, orthogonalised, and generalised impulse response
functions.
Forecast error impulse response
FEIR <- irf(bvar_est, impulse = "income", response = "cons", n.ahead = 8)
plot(FEIR, main = "Forecast Error Impulse Response", xlab = "Period", ylab = "Respo
Orthogonalised impulse response
OIR <- irf(bvar_est, impulse = "income", response = "cons", n.ahead = 8, type = "oi
plot(OIR, main = "Orthogonalised Impulse Response", xlab = "Period", ylab = "Respon

Generalised impulse response
GIR <- irf(bvar_est, impulse = "income", response = "cons", n.ahead = 8, type = "gi
plot(GIR, main = "Generalised Impulse Response", xlab = "Period", ylab = "Response"
Forecast error variance decomposition

Default forecast error variance decomposition (FEVD) is based on orthogonalised impulse responses
(OIR).
bvar_fevd_oir <- fevd(bvar_est, response = "cons")
plot(bvar_fevd_oir, main = "OIR-based FEVD of consumption")
It is also possible to calculate FEVDs, which are based on generalised impulse responses (GIR). Note
that these do not automatically add up to unity.
bvar_fevd_gir <- fevd(bvar_est, response = "cons", type = "gir")
plot(bvar_fevd_gir, main = "GIR-based FEVD of consumption")

References
Chan, J., Koop, G., Poirier, D. J., & Tobias, J. L. (2019). Bayesian Econometric Methods (2nd ed.).
Cambridge: University Press.
Koop, G., & Korobilis, D. (2010). Bayesian multivariate time series methods for empirical
macroeconomics. Foundations and trends in econometrics, 3(4), 267-358.
https://dx.doi.org/10.1561/0800000013
Koop, G., Pesaran, M. H., & Potter, S.M. (1996). Impulse response analysis in nonlinear multivariate
models. Journal of Econometrics 74(1), 119-147. https://doi.org/10.1016/0304-4076(95)01753-4
Lütkepohl, H. (2007). New introduction to multiple time series analysis (2nd ed.). Berlin: Springer.
Kennedy, P. (2008). A guide to econometrics (6th ed.) Malden, MA: Blackwell.
Pesaran, H. H., & Shin, Y. (1998). Generalized impulse response analysis in linear multivariate models.
Economics Letters, 58(1), 17-29. https://doi.org/10.1016/S0165-1765(97)00214-0
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trafalgarlaw1508 • 2 months ago

Hi Franz, thank you so much for all this. It is tremendously useful. I have not had the opportunity to study bayesian VAR thoroughly
but stumbled upon this package because I need to generate GIR FEVD using R, which does not seem to be possible with the
regular frequentist VAR packages. Therefore, I would like to use bvartools to estimate a frequentist VAR. I gathered that this is
possible by making the priors uninformative, as you mentioned in this blog post.
I plan to use the quick function add_priors, with all the parameters set to 0 (aside from scale).
model_with_priors <- add_priors(model,

coef = list(v_i = 0, v_i_det = 0),
sigma = list(df = 1, scale = .0001))
Please forgive my shallow understanding, but how should I set the scale parameter so that it is uninformative and the result is
equivalent to a frequentist VAR estimation?
Many thanks in advance!

△ ▽ • Reply • Share ›
Franz Mohr Mod > trafalgarlaw1508 • 5 days ago

Hey, really sorry for the late reply. Crazy times... I would say the specification for coef is right for that purpose. With respect to
sigma, you could set df to 0 and scale to something even smaller like 0.0000001.
David • 5 months ago

Hi Franz! thank you very much for the package and all these useful tutorials!
I would like to ask you about previous conditional forecast discussion. As I understood, the way you explain to get conditional
forecast is by adding the "B" matrix of coefficients from exogenous variables into bvar object and then adding values into "new_x"
part in function Predict. But, could it be possible to set a fixed path to one of the endogeous variables? For example, imagine I've got
a log-differenced BVAR model with 3 endogenous variables like GDP, Employment and Inflation and I want to set a deterministic
extreme path for employment (trying to simulate a Coivd19 shock, the "square root" recession).
And one last question, have you read the paper written by Lenza. M. and Primiceri. G. "How to Estimate a VAR after March 2020"?
They provide a method to model the change in shock volatilty derived from this new health crisis. Do you think it would be possible
to implement in your package?
Thank you
David
Franz Mohr Mod > David • 4 months ago

Hi David! Sorry for the very late reply. Lots going on. Unfortunately, it's not possible at the moment to provide a path for the
endogenous variables. But that's definitly something for a next version. Thank you for making me aware of that! Also, thank
you for the link. I will definitely look into into the paper, but I can't promise to implement it soon!
Best, Franz
David > Franz Mohr • 3 months ago

Hi Franz! Thank you very much for your answer!
I have a new doubt. When I was working with my BVARX with 8 endogenous and 4 exogenous, I realised that when I
run the "predict" command after estimation, the predicted values do not correspond with the timing path of exogenous
variables. For example, I have an observable sample for period 1997 Q2 - 2020 Q3 and the future path for exogenous
variables starts at 2020Q4, but when I do the prediction, exogenous variables start to affect predicted values from
2021Q1 (like it was lagged, but it's not my case). It's like that, for the first predicted period, the command does an
unconditional forecast, and from second period a conditional one. Maybe I am not specifying correctly exogenous
variables but I did it as you explained to Zoro594. Any idea about what's going on here?
Thank you so much again, I am enjoying a lot your package.

David
Franz Mohr Mod > David • 5 days ago

Really sorry for the late reply, David! I realise that the new_x argument is too complicated. Thus, I just updated
the development version on GitHub. You can now specify a simple ts-object instead and should not need to
care too much about it. Could you check and tell me, if your issue continues to exist? Best, Franz
Zoro594 • 6 months ago

Hi, thank you very much for this tutorial.
Is it possible with your bvartools package to do a condition forecast based on specific values?
For example, I have 5 variables at time t, can I do a forecast of 4 variables at time t+1 assuming 1 variable (e.g. GDP) equals X ?
Thank you
Franz Mohr Mod > Zoro594 • 6 months ago

Hi! Yes, conditional forecasts are currently possible for models with exogenous variables using the argument new_x in
predict. You need to specifiy argument "B" in function bvar with the parameters that correspond to the exogenous variables.
Predict will multiply those coefficients with the values in new_x. Note that object new_x must contain as many rows as
argument n.ahead and as many columns as the number of exogenous regressors (and their legs). Hope this helps. Let me
argument n.ahead and as many columns as the number of exogenous regressors (and their legs). Hope this helps. Let me
know if you have any further questions.
Zoro594 > Franz Mohr • 5 months ago

Hi, thank you very much for your help!
I’ve inserted exogenous variables as you said and the script runs well now.
But my Bayesian VARX seems not working properly. The out-of-sample values are completely disproportionate and
end up exploding. The log differenced data range between 0.9 and 1.1, but the 4-step forecasts are 1.3, 25, 78 and
200.
I’ve 3 endogenous variables, 4 exogenous and 70 observations.
I took the same priors as in your tutorial and a 4 lag. The priors you proposed seem ok so I don’t understand why it
doesn’t work. Would you have an idea or a reference on the internet on how to choose the right priors for an inverted
Wishart (which I understand is what you have in the tutorial). Or do you think that the issue stems from elsewhere?
Attached I've plotted the original data and the prediction for VAR 1, VAR 2 and VAR 3:
see more

Hi, I am glad that the functions work now. The values I have come across so far for the scale parameter of the
inverse Wishart prior are 0.0001 and 1. Basically, I would suggest that this value is smaller than the variance of
the series that you use for estimation. From your sample, it seems that the values fluctuate slightly around their
means. And the deviation seems to be a lot lower than 1. Maybe try the smaller scale parameter of 0.0001 and
use 3 prior degrees of freedom. I had a similar problem some days ago and that fixed it. Just to be sure: You
should also not use exogenous variables in their original scale in predict, but use them as they enter the
estimation. equations. Also: Maybe check size of the frequentist estimates of the coefficients. If some of them
are larger than 1, a prior variance of 1 - as used in the introduction - might not be suitable for your model and
you should decrease the prior precision accordingly. If non of this helps, I am happy to look at your script and
data myself.
Unfortunately, RMSE analysis or cross-validation are not implemented in bvartools yet. I am still searching for
a way to do that. So I fear I can't answer that question. However, I am not sure if such analyses are even
possible without any recursive loop. But I will keep my eyes open.
Thanks for the hint with the website. I updated bvartools yesterday and havn't updated the homepage until
some minutes ago. However, the vignettes of the package might be useful.
Let me now, if the above helped.
Best, Franz

Hi Frantz,
Thank you very much for your answer.
As you pointed it, the problem was scaling, as all variables were not transformed when entering the equations.
I have something with a better looking now.

I’ve computed RMSE for VAR1 (the only one to be forecasted) for different hyperparameters and strangely the
lowest RMSE is with a precision of 1000: a_v_i_prior <- diag(1000, m). Does it make sense to you? I
understand that the precision matrix is the inverse of the variance. If I extrapolates from the univariate case,
does it mean that I assume a very low prior variance (i.e. 1/1000)? I'm trying to understand how I should
properly twick it.
see more

Hey!
Glad to hear that it works better now! With respect to the precision of 1000, this means that you assume a
variance of 0.001 around the prior mean for the coefficient. Assuming that you used a prior mean of zero for all
coefficients, this means that you "tweak" the coefficient very close to zero, which is a quite strong assumption.
This might also be the reason, why the RMSE are so close together and not sensitive to the priors of the
covariance matrix. The indicators are more or less based on the variances of the original series in that case.
"Tweaking" the priors is a delicate issue. Not only in order to obtain good results, but also to maintain a sound
scientific approach. I mention the latter, because in theory you could manipulate the analysis as you wish by
specifying a certain prior mean and using a high precision so that the posterior i close to the value that you
want. To avoid that, it is common to use zero means and reasonable variances/precisions around them.
Seeing that your data floats around zero, this seems an appropriate approach too. A commonly employed
approach is the Minnesota prior, which is based on AR estimations of the endogenous variables. bvartools
contains a functions to create those priors. Maybe try that. Given the high differences in the scales of your
series, this might even be a good idea.
Regarding the extra exogenous variables for better performance I would say that this is similar to a frequentist
approach, where additional variables will never decrease the R-squared, but lead to increased parameter
uncertainty. However, you might be able to mitigate the latter issue by using relatively informed priors, but keep
in mind that such tweaking must be done carefully and responsibly.
Best,
Franz

Hi Franz,
Those are very clear explanations, thank you very much ! I get a much clearer view of my... mistake.
I will have a try to the Minnesota prior then.
Many thanks again
divijkohli • 8 months ago

Hi Franz,
Thank you for such a nicely written, easy to understand piece. I was wondering by any chance do you plan to /or already have
published something similar for TVAR ? I would really appreciate if you can guide me in the right path for this topic. thank you again.
Franz Mohr Mod > divijkohli • 8 months ago
Hey! Just to be sure. Do you mean TVAR as in threshold VAR?

camilo lopez > Franz Mohr • 3 months ago

Hi Franz,
I was wondering the same. Have you by any chance estimated a threshold var with exogenous variables?
Franz Mohr Mod > camilo lopez • 5 days ago

Hi Camilo! Unfortunately not yet. Do you have any preferences for a specific model? Best, Franz
Dan Kreutzjans • a year ago

Franz, have you ever encountered this error running the code "number of items to replace is not a multiple of replacement length"?
Franz Mohr Mod > Dan Kreutzjans • a year ago

Hi Dan! Yes, I'm quite familiar with this error. It usually occurs when you try to fill elements of an object with new data, but the
new data does not contain as many observations as there are elements to fill in the object. Maybe this helps:
https://stackoverflow.com/q...
Adrienne Welch • a year ago

Hi, thanks for another nice article. Just a quick question (same question for the classical VAR too). how can I specify negative shock.
I understand that the following chunk of code provides 1 sd positive shock of income on cons. So my question is, how do I get the
response of cons to a 1 sd negative income shock.
FEIR <- irf(bvar_est, impulse = "income", response = "cons", n.ahead = 8)
plot(FEIR, main = "Forecast Error Impulse Response", xlab = "Period", ylab = "Response")
from "An Introduction to Impulse Response Analysis of VAR Models" article:

feir <- irf(model, impulse = "income", response = "cons", n.ahead = 8, ortho = FALSE, runs = 1000)
plot(feir)
Thanks for your response.

1△ ▽ • Reply • Share ›
Franz Mohr Mod > Adrienne Welch • a year ago
Hi, Unfortunately, shock specification is currently not implemented in the package, but im working on it. However, if you can
live with the sd shock, you could multiply the output of the irf function by -1 to get the negative sd shock. Since it's a linear
model the transmission channels should be the same, so that the outcome is just the opposite of the positive shock.
And regarding your last question on FAVARs: Yes, I definitely plan to write something about it and try to replicate Bernanke et
al. (2005). Sorry for the late reply to this though.
△ ▽ R l Sh
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05.03.

2021 An Introduct on to Bayes an VAR (BVAR) Models · r-econometr cs

An Introduction to Bayesian VAR (BVAR) Models

where yt is a K × 1 vector of endogenous variables in period t, Ai is the co cient matrix

As already mentioned, Bayesian inference can be algebraically demanding. However, Bayesian

Model and data

https://www.r-econometr cs.com/t meser es/bvar/ 1/16

data("e1") # Load the data

# Reduce number of oberservations

e1 <- e1 * 100 # Rescale data

plot(e1) # Plot the series

https://www.r-econometr cs.com/t meser es/bvar/ 2/16

data <- gen_var(e1, p = 2, deterministic = "const")

A_freq <- tcrossprod(y, x) %*% solve(tcrossprod(x)) # Calculate estimates

## invest.1 income.1 cons.1 invest.2 income.2 cons.2 const

u_freq <- y - A_freq %*% x

## invest income cons

https://www.r-econometr cs.com/t meser es/bvar/ 3/16

# Reset random number generator for reproducibility

iter <- 30000 # Number of iterations of the Gibbs sampler

tt <- ncol(y) # Number of observations

u_sigma_df_prior <- 6 # Prior degrees of freedom

https://www.r-econometr cs.com/t meser es/bvar/ 4/16

# Data containers for posterior draws

Finally run the Gibbs sampler.

# Start Gibbs sampler

# Draw variance-covariance matrix

A <- rowMeans(draws_a) # Obtain means for every row

https://www.r-econometr cs.com/t meser es/bvar/ 5/16

## invest.1 income.1 cons.1 invest.2 income.2 cons.2 const

Sigma <- rowMeans(draws_sigma) # Obtain means for every row

## invest income cons

bvar_est <- bvar(y = data$data$Y, x = data$data$Z, A = draws_a[1:18,],

There is also a summary function, which calculates some summary statistics

https://www.r-econometr cs.com/t meser es/bvar/ 6/16

Posterior draws can be thinned with the function thin:

bvar_est <- thin_posterior(bvar_est, thin = 15)

bvar_pred <- predict(bvar_est, n.ahead = 10, new_d = rep(1, 10))

Impulse response analysis

Forecast error impulse response

FEIR <- irf(bvar_est, impulse = "income", response = "cons", n.ahead = 8)

Orthogonalised impulse response

plot(OIR, main = "Orthogonalised Impulse Response", xlab = "Period", ylab = "Respon

https://www.r-econometr cs.com/t meser es/bvar/ 9/16

Generalised impulse response

plot(GIR, main = "Generalised Impulse Response", xlab = "Period", ylab = "Response"

Forecast error variance decomposition

bvar_fevd_oir <- fevd(bvar_est, response = "cons")

plot(bvar_fevd_oir, main = "OIR-based FEVD of consumption")

bvar_fevd_gir <- fevd(bvar_est, response = "cons", type = "gir")

plot(bvar_fevd_gir, main = "GIR-based FEVD of consumption")

https://www.r-econometr cs.com/t meser es/bvar/ 11/16

Kennedy, P. (2008). A guide to econometrics (6th ed.) Malden, MA: Blackwell.

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trafalgarlaw1508 • 2 months ago

model_with_priors <- add_priors(model,

Many thanks in advance!

Franz Mohr Mod > trafalgarlaw1508 • 5 days ago

https://www.r-econometr cs.com/t meser es/bvar/ 12/16

David • 5 months ago

Franz Mohr Mod > David • 4 months ago