We develop a novel Bayesian doubly adaptive elastic-net Lasso (DAELasso) approach for VAR shrinkage. DAELasso achieves variable selection and coefficients shrinkage in a data based manner. It constructively deals with the explanatory variables that tend to be highly collinear by encouraging grouping effect. In addition, it allows for different degree of shrinkages for different coefficients. Rewriting the multivariate Laplace distribution as a scale mixture, we establish closed-form conditional posteriors that can be drawn from a Gibbs sampler. Empirical analysis shows that forecast results produced by DAELasso and its variants are comparable to that of other popular Bayesian methods, which provides further evidence that the forecast performances of large and medium sized Bayesian VARs are relatively robust to prior choices, and in practice simple Minnesota types of priors can be more attractive relative to their complex and well designed alternatives. * I would like to thank Gary Koop, Esther Ruiz and two anonymous referees for their constructive comments. I would also like to thank the conference participants of CFE11, ESEM2012, and RCEF2012 for helpful discussions. Any remaining errors are my own responsibility.
This paper develops a structured dynamic factor model for the spreads between London Interbank O¤ered Rate (LIBOR) and overnight index swap (OIS) rates for a panel of banks. Our model involves latent factors which re ‡ect liquidity and credit risk. Our empirical results show that surges in the short term LIBOR-OIS spreads during the 2007-2009 …nancial crisis were largely driven by liquidity risk. However, credit risk played a more signi…cant role in the longer term (twelve-month) LIBOR-OIS spread. The liquidity risk factors are more volatile than the credit risk factor. Most of the familiar events in the …nancial crisis are linked more to movements in liquidity risk than credit risk.
Employing a Bayesian approach, we investigate the impact of international business cycles on the UK economy in the context of a smooth transition VAR. We find that British business cycle is asymmetrically influenced by the US, France and Germany. Overall, positive and negative shocks generating in the US or France affect the UK in the same directions of the shock. Yet, a shock emanating from Germany always exerts negative accumulative effects on the UK. More strikingly, a positive shock arising from Germany negatively affects UK output growth more than a negative shock from Germany of the same size. These results suggest that the appropriate UK economic policy depends upon the origin, size and direction of the external shocks.JEL: C11, C32, C52, E32, F42.
This paper investigates the relationship between short term and long term in ‡ation expectations in the US and the UK with a focus on in ‡ation pass through (i.e. how changes in short term expectations a¤ect long term expectations). An econometric methodology is used which allows us to uncover the relationship between in ‡ation pass through and various explanatory variables. We relate our empirical results to theoretical models of anchored, contained and unmoored in ‡ation expectations. For neither country do we …nd anchored or unmoored in ‡ation expectations. For the US, contained in ‡ation expectations are found. For the UK, our …ndings are not consistent with the speci…c model of contained in ‡ation expectations presented here, but are consistent with a more broad view of expectations being constrained by the existence of an in ‡ation target.
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