Tail Forecasting with Multivariate Bayesian Additive Regression Trees

RePEc Short ID: pcl55
ORCID iD: 0000-0002-4985-1709

Clark, Todd E.; Huber, Florian; Koop, Gary; Marcellino, Massimiliano; Pfarrhofer, Michael

doi:10.26509/frbc-wp-202108

Working Paper

Tail Forecasting with Multivariate Bayesian Additive Regression Trees

Abstract: We develop novel multivariate time series models using Bayesian additive regression trees that posit nonlinear relationships among macroeconomic variables, their lags, and possibly the lags of the errors. The variance of the errors can be stable, driven by stochastic volatility (SV), or follow a novel nonparametric specification. Estimation is carried out using scalable Markov chain Monte Carlo estimation algorithms for each specification. We evaluate the real-time density and tail forecasting performance of the various models for a set of US macroeconomic and financial indicators. Our results suggest that using nonparametric models generally leads to improved forecast accuracy. In particular, when interest centers on the tails of the posterior predictive, flexible models improve upon standard VAR models with SV. Another key finding is that if we allow for nonlinearities in the conditional mean, allowing for heteroskedasticity becomes less important. A scenario analysis reveals highly nonlinear relations between the predictive distribution and financial conditions.

Keywords: nonparametric VAR; regression trees; macroeconomic forecasting;

JEL Classification: C11; C32; C53;

https://doi.org/10.26509/frbc-wp-202108