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Forecasting with EC-VARMA Models

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Athanasopoulos, G and Poskitt, D and Vahid, F and Yao, W (2014) Forecasting with EC-VARMA Models. Discussion Paper. University of Tasmania. (Unpublished)

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Abstract

This article studies error correction vector autoregressive moving average (ECVARMA) models. A complete procedure for identifying and estimating EC-VARMA models is proposed. The cointegrating rank is estimated in the first stage using an extension of the non-parametric method of Poskitt (2000). Then, the structure of the VARMA model for variables in levels is identified using the scalar component model (SCM) methodology developed in Athanasopoulos and Vahid (2008), which leads to a uniquely identifiable VARMA model. In the last stage, the VARMA model is estimated in its error correction form. Monte Carlo simulation is conducted using a
3-dimensional VARMA(1,1) DGP with cointegrating rank 1, in order to evaluate the forecasting performances of the EC-VARMA models. This algorithm is illustrated further using an empirical example of the term structure of U.S. interest rates. The results reveal that the out-of-sample forecasts of the EC-VARMA model are superior to those produced by error correction vector autoregressions (VARs) of finite order, especially in short horizons.

Item Type: Report (Discussion Paper)
Keywords: cointegration; VARMA model; iterative OLS; scalar component model; repec
Publisher: University of Tasmania
Additional Information:

Copyright 2014 The University of Tasmania

Date Deposited: 27 May 2014 00:42
Last Modified: 18 Nov 2014 05:00
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