Template-Type: ReDIF-Paper 1.0
Author-Name: Sharada Davidson
Author-Name-First: Sharada
Author-Name-Last: Davidson
Author-Workplace-Name: Department of Economics, University of Strathclyde
Author-Name: Chenghan Hou
Author-Name-First: Chenghan
Author-Name-Last: Hou
Author-Workplace-Name: Hunan University, Center for Economics, Finance and Management Studies, China
Author-Name: Gary Koop
Author-Name-First: Gary
Author-Name-Last: Koop
Author-Workplace-Name: Department of Economics, University of Strathclyde
Title: Investigating Economic Uncertainty Using Stochastic Volatility in Mean VARs: The Importance of Model Size, Order-Invariance and Classification
Abstract: Stochastic Volatility in Mean Vector Autoregressions (SVMVARs) are popularly used
to jointly estimate macroeconomic and financial uncertainty and their economic effects.
However, SVMVARs are computationally demanding. To ease the computational burden,
existing approaches limit the number of variables included, adopt a specication
which is not invariant to the way the variables are ordered and require the researcher
to classify each variable as macroeconomic or financial before estimation. To overcome
these limitations, we develop an efficient Markov Chain Monte Carlo (MCMC) algorithm
for SVMVARs which are large, order-invariant and have unclassifieded variables.
For each unclassifieded variable, the algorithm determines the appropriate classication
at each point in time. We demonstrate the importance of these extensions using a
large SVMVAR with over 40 U.S. variables, 16 of which are treated as unclassified.
We show that smaller SVMVARs overestimate the economic effects of macroeconomic
uncertainty, failing to reveal that financial uncertainty plays a larger role. When using
large SVMVARs, however, different orderings yield conflicting results and it becomes
critical to use an order-invariant specication. We also find that most unclassified variables
change classication over time with changes often occurring during crisis periods.
Length:  pages
Creation-Date: 
Revision-Date: 
Publication-Status: 
Number: 2306
Classification-JEL: C11, C52, C55, E32, E44
Keywords: Large VAR, Uncertainty, Stochastic Volatility, Order Invariance
Handle: RePEc:str:wpaper:2306