School of Economics and Finance

No. 759: Large Vector Autoregressions with Asymmetric Priors

Andrea Carriero , Queen Mary University of London
Todd E. Clark , Federal Reserve Bank of Cleveland
Massimiliano Marcellino , Bocconi University, IGIER and CEPR

November 28, 2015

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We propose a new algorithm which allows easy estimation of Vector Autoregressions (VARs) featuring asymmetric priors and time varying volatilities, even when the cross sectional dimension of the system N is particularly large. The algorithm is based on a simple triangularisation which allows to simulate the conditional mean coefficients of the VAR by drawing them equation by equation. This strategy reduces the computational complexity by a factor of N2 with respect to the existing algorithms routinely used in the literature and by practitioners. Importantly, this new algorithm can be easily obtained by modifying just one of the steps of the existing algorithms. We illustrate the benefits of the algorithm with numerical and empirical applications.

J.E.L classification codes: C11, C13, C33, C53

Keywords:Bayesian VARs, Stochastic volatility, Large datasets, Forecasting, Impulse response functions