Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of Cleveland
Working Papers (Old Series)
Common drifting volatility in large Bayesian VARs
Andrea Carriero
Todd E. Clark
Massimiliano Marcellino

The estimation of large vector autoregressions with stochastic volatility using standard methods is computationally very demanding. In this paper we propose to model conditional volatilities as driven by a single common unobserved factor.> This is justified by the observation that the pattern of estimated volatilities in empirical analyses is often very similar across variables. Using a combination of a standard natural conjugate prior for the VAR coefficients and an independent prior on a common stochastic volatility factor, we derive the posterior densities for the parameters of the resulting BVAR with common stochastic volatility (BVAR-CSV). Under the chosen prior, the conditional posterior of the VAR coefficients features a Kroneker structure that allows for fast estimation, even in a large system. Using US and UK data, we show that, compared to a model with constant volatilities, our proposed common volatility model significantly improves model fit and forecast accuracy. The gains are comparable to or as great as the gains achieved with a conventional stochastic volatility specification that allows independent volatility processes for each variable. But our common volatility specification greatly speeds computations.

Download Full text
Cite this item
Andrea Carriero & Todd E. Clark & Massimiliano Marcellino, Common drifting volatility in large Bayesian VARs, Federal Reserve Bank of Cleveland, Working Papers (Old Series) 1206, 2012.
More from this series
JEL Classification:
Subject headings:
Keywords: Economic forecasting ; Bayesian statistical decision theory ; Econometric models ; Estimation theory
For corrections, contact 4D Library ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal