Asymmetric Conjugate Priors for Large Bayesian VARs

Joshua Chan (2022)
Quantitative Economics, 13(3): 1145-1169
[ Journal Version | Working Paper | Code ]

This code estimates a large Bayesian VAR with a new asymmetric conjugate prior. Unlike the standard natural conjugate prior that rules out cross-variable shrinkage, this new prior allows one to shrink coefficients on lags of other variables more aggressively than those on own lags.

In addition, the marginal likelihood under this new prior is available in closed-form. The code also obtains the optimal shrinkage hyperparameters by maximizing the marginal likelihood.

The empirical application identifies 5 structural shocks — supply, demand, monetary, investment, financial — using a 15-variable VAR and sign restrictions.

An earlier version of the paper has a forecasting application. The associated code can be downloaded here.