normalbvarm

Bayesian vector autoregression (VAR) model with normal conjugate prior and fixed covariance for data likelihood

Since R2020a

Description

The Bayesian VAR model object normalbvarm specifies the prior distribution of the array of model coefficients Λ in an m-D VAR(p) model, where the innovations covariance matrix Σ is known and fixed. The prior distribution of Λ is the normal conjugate prior model.

In general, when you create a Bayesian VAR model object, it specifies the joint prior distribution and characteristics of the VARX model only. That is, the model object is a template intended for further use. Specifically, to incorporate data into the model for posterior distribution analysis, pass the model object and data to the appropriate object function.

Creation

Syntax

PriorMdl = normalbvarm(numseries,numlags)

PriorMdl = normalbvarm(numseries,numlags,Name,Value)

Description

To create a normalbvarm object, use either the normalbvarm function (described here) or the bayesvarm function. The syntaxes for each function are similar, but the options differ. bayesvarm enables you to set prior hyperparameter values for Minnesota prior[1] regularization easily, whereas normalbvarm requires the entire specification of prior distribution hyperparameters.

PriorMdl = normalbvarm(numseries,numlags) creates a numseries-D Bayesian VAR(numlags) model object PriorMdl, which specifies dimensionalities and prior assumptions for all model coefficients $λ = vec (Λ) = vec ({[\begin{matrix} Φ_{1} & Φ_{2} & \dots & Φ_{p} & c & δ & Β \end{matrix}]}^{'})$ , where:

numseries = m, the number of response time series variables.
numlags = p, the AR polynomial order.
The prior distribution of λ is the normal conjugate prior model.
The fixed innovations covariance Σ is the m-by-m identity matrix.

example

PriorMdl = normalbvarm(numseries,numlags,Name,Value) sets writable properties (except NumSeries and P) using name-value pair arguments. Enclose each property name in quotes. For example, normalbvarm(3,2,'Sigma',4*eye(3),'SeriesNames',["UnemploymentRate" "CPI" "FEDFUNDS"]) specifies the names of the three response variables in the Bayesian VAR(2) model, and fixes the innovations covariance matrix at 4*eye(3).

example

Input Arguments

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`numseries` — Number of time series m
`1` (default) | positive integer

Number of time series m, specified as a positive integer. numseries specifies the dimensionality of the multivariate response variable y_t and innovation ε_t.

numseries sets the NumSeries property.

Data Types: double

`numlags` — Number of lagged responses
nonnegative integer

Number of lagged responses in each equation of y_t, specified as a nonnegative integer. The resulting model is a VAR(numlags) model; each lag has a numseries-by-numseries coefficient matrix.

numlags sets the P property.

Data Types: double

Properties

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You can set writable property values when you create the model object by using name-value argument syntax, or after you create the model object by using dot notation. For example, to create a 3-D Bayesian VAR(1) model and label the first through third response variables, and then include a linear time trend term, enter:

PriorMdl = normalbvarm(3,1,'SeriesNames',["UnemploymentRate" "CPI" "FEDFUNDS"]);
PriorMdl.IncludeTrend = true;

Model Characteristics and Dimensionality

`Description` — Model description
string scalar | character vector

Model description, specified as a string scalar or character vector. The default value describes the model dimensionality, for example '2-Dimensional VAR(3) Model'.

Example: "Model 1"

Data Types: string | char

`NumSeries` — Number of time series m
positive integer

This property is read-only.

Number of time series m, specified as a positive integer. NumSeries specifies the dimensionality of the multivariate response variable y_t and innovation ε_t.

Data Types: double

`P` — Multivariate autoregressive polynomial order
nonnegative integer

This property is read-only.

Multivariate autoregressive polynomial order, specified as a nonnegative integer. P is the maximum lag that has a nonzero coefficient matrix.

P specifies the number of presample observations required to initialize the model.

Data Types: double

`SeriesNames` — Response series names
string vector | cell array of character vectors

Response series names, specified as a NumSeries length string vector. The default is ['Y1' 'Y2' ... 'YNumSeries']. normalbvarm stores SeriesNames as a string vector.

Example: ["UnemploymentRate" "CPI" "FEDFUNDS"]

Data Types: string

`IncludeConstant` — Flag for including model constant c
`true` (default) | `false`

Flag for including a model constant c, specified as a value in this table.

Value	Description
`false`	Response equations do not include a model constant.
`true`	All response equations contain a model constant.

Data Types: logical

`IncludeTrend` — Flag for including linear time trend term δt
`false` (default) | `true`

Flag for including a linear time trend term δt, specified as a value in this table.

Value	Description
`false`	Response equations do not include a linear time trend term.
`true`	All response equations contain a linear time trend term.

Data Types: logical

`NumPredictors` — Number of exogenous predictor variables in model regression component
`0` (default) | nonnegative integer

Number of exogenous predictor variables in the model regression component, specified as a nonnegative integer. normalbvarm includes all predictor variables symmetrically in each response equation.

Distribution Hyperparameters

`Mu` — Mean of multivariate normal prior on λ
`zeros(NumSeries(NumSeriesP + IncludeIntercept + IncludeTrend + NumPredictors),1)` (default) | numeric vector

Mean of the multivariate normal prior on λ, specified as a NumSeries*k-by-1 numeric vector, where k = NumSeries*P + IncludeIntercept + IncludeTrend + NumPredictors (the number of coefficients in a response equation).

Mu(1:k) corresponds to all coefficients in the equation of response variable SeriesNames(1), Mu((k + 1):(2*k)) corresponds to all coefficients in the equation of response variable SeriesNames(2), and so on. For a set of indices corresponding to an equation:

Elements 1 through NumSeries correspond to the lag 1 AR coefficients of the response variables ordered by SeriesNames.
Elements NumSeries + 1 through 2*NumSeries correspond to the lag 2 AR coefficients of the response variables ordered by SeriesNames.
In general, elements (q – 1)*NumSeries + 1 through q*NumSeries corresponds to the lag q AR coefficients of the response variables ordered by SeriesNames.
If IncludeConstant is true, element NumSeries*P + 1 is the model constant.
If IncludeTrend is true, element NumSeries*P + 2 is the linear time trend coefficient.
If NumPredictors > 0, elements NumSeries*P + 3 through k constitute the vector of regression coefficients of the exogenous variables.

This figure shows the structure of the transpose of Mu for a 2-D VAR(3) model that contains a constant vector and four exogenous predictors:

$[\overset{y_{1, t}}{\overset{︷}{\begin{matrix} ϕ_{1, 11} & ϕ_{1, 12} & ϕ_{2, 11} & ϕ_{2, 12} & ϕ_{3, 11} & ϕ_{3, 12} & c_{1} & β_{11} & β_{12} & β_{13} & β_{14} \end{matrix}}} \overset{y_{2, t}}{\overset{︷}{\begin{matrix} ϕ_{1, 21} & ϕ_{1, 22} & ϕ_{2, 21} & ϕ_{2, 22} & ϕ_{3, 21} & ϕ_{3, 22} & c_{2} & β_{21} & β_{22} & β_{23} & β_{24} \end{matrix}}}],$

where

ϕ_q,jk is element (j,k) of the lag q AR coefficient matrix.
c_j is the model constant in the equation of response variable j.
B_ju is the regression coefficient of the exogenous variable u in the equation of response variable j.

Tip

bayesvarm enables you to specify Mu easily by using the Minnesota regularization method. To specify Mu directly:

Set separate variables for the prior mean of each coefficient matrix and vector.
Horizontally concatenate all coefficient means in this order:

$C o e f f = [\begin{matrix} Φ_{1} & Φ_{2} & \dots & Φ_{p} & c & δ & Β \end{matrix}] .$
Vectorize the transpose of the coefficient mean matrix.
```
Mu = Coeff.';
Mu = Mu(:);
```

Data Types: double

`V` — Conditional covariance matrix of multivariate normal prior on λ
`eye(NumSeries(NumSeriesP + IncludeIntercept + IncludeTrend + NumPredictors))` (default) | symmetric, positive definite numeric matrix

Conditional covariance matrix of multivariate normal prior on λ, specified as a NumSeries*k-by-NumSeries*k symmetric, positive definite matrix, where k = NumSeries*P + IncludeIntercept + IncludeTrend + NumPredictors (the number of coefficients in a response equation).

Row and column indices correspond to the model coefficients in the same way as Mu. For example, consider a 3-D VAR(2) model containing a constant and four exogenous variables.

V(1,1) is Var(ϕ_1,11).
V(5,6) is Cov(ϕ_2,12,ϕ_2,13).
V(8,9) is Cov(β₁₁,β₁₂).

Tip

bayesvarm enables you to create any Bayesian VAR prior model and specify V easily by using the Minnesota regularization method.

Data Types: double

`Sigma` — Fixed innovations covariance matrix Σ
`eye(NumSeries)` (default) | positive definite numeric matrix

Fixed innovations covariance matrix Σ of the NumSeries innovations at each time t = 1,...,T, specified as a NumSeries-by-NumSeries positive definite numeric matrix. Rows and columns correspond to innovations in the equations of the response variables ordered by SeriesNames.

Sigma sets the Covariance property.

Data Types: double

VAR Model Parameters Derived from Distribution Hyperparameters

`AR` — Distribution mean of autoregressive coefficient matrices Φ₁,…,Φ_p
cell vector of numeric matrices

This property is read-only.

Distribution mean of the autoregressive coefficient matrices Φ₁,…,Φ_p associated with the lagged responses, specified as a P-D cell vector of NumSeries-by-NumSeries numeric matrices.

AR{j} is Φ_j, the coefficient matrix of lag j. Rows correspond to equations and columns correspond to lagged response variables; SeriesNames determines the order of response variables and equations. Coefficient signs are those of the VAR model expressed in difference-equation notation.

If P = 0, AR is an empty cell. Otherwise, AR is the collection of AR coefficient means extracted from Mu.

Data Types: cell

`Constant` — Distribution mean of model constant c
numeric vector

This property is read-only.

Distribution mean of the model constant c (or intercept), specified as a NumSeries-by-1 numeric vector. Constant(j) is the constant in equation j; SeriesNames determines the order of equations.

If IncludeConstant = false, Constant is an empty array. Otherwise, Constant is the model constant vector mean extracted from Mu.

Data Types: double

`Trend` — Distribution mean of linear time trend δ
numeric vector

This property is read-only.

Distribution mean of the linear time trend δ, specified as a NumSeries-by-1 numeric vector. Trend(j) is the linear time trend in equation j; SeriesNames determines the order of equations.

If IncludeTrend = false (the default), Trend is an empty array. Otherwise, Trend is the linear time trend coefficient mean extracted from Mu.

Data Types: double

`Beta` — Distribution mean of regression coefficient matrix Β
numeric matrix

This property is read-only.

Distribution mean of the regression coefficient matrix B associated with the exogenous predictor variables, specified as a NumSeries-by-NumPredictors numeric matrix.

Beta(j,:) contains the regression coefficients of each predictor in the equation of response variable j y_j,t. Beta(:,k) contains the regression coefficient in each equation of predictor x_k. By default, all predictor variables are in the regression component of all response equations. You can down-weight a predictor from an equation by specifying, for the corresponding coefficient, a prior mean of 0 in Mu and a small variance in V.

When you create a model, the predictor variables are hypothetical. You specify predictor data when you operate on the model (for example, when you estimate the posterior by using estimate). Columns of the predictor data determine the order of the columns of Beta.

Data Types: double

`Covariance` — Fixed innovations covariance matrix Σ
positive definite numeric matrix

This property is read-only.

Fixed innovations covariance matrix Σ of the NumSeries innovations at each time t = 1,...,T, specified as a NumSeries-by-NumSeries symmetric, positive definite numeric matrix. Rows and columns correspond to innovations in the equations of the response variables ordered by SeriesNames.

The Sigma property sets Covariance.

Data Types: double

Object Functions

`estimate`	Estimate posterior distribution of Bayesian vector autoregression (VAR) model parameters
`forecast`	Forecast responses from Bayesian vector autoregression (VAR) model
`simsmooth`	Simulation smoother of Bayesian vector autoregression (VAR) model
`simulate`	Simulate coefficients and innovations covariance matrix of Bayesian vector autoregression (VAR) model
`summarize`	Distribution summary statistics of Bayesian vector autoregression (VAR) model

Examples

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Create Normal Conjugate Prior Model

Open Live Script

Consider the 3-D VAR(4) model for the US inflation (INFL), unemployment (UNRATE), and federal funds (FEDFUNDS) rates.

$[\begin{array}{llllllllllllllllllll} {INFL}_{t} \\ {UNRATE}_{t} \\ {FEDFUNDS}_{t} \end{array}] = c + \sum_{j = 1}^{4} Φ_{j} [\begin{array}{llllllllllllllllllll} {INFL}_{t - j} \\ {UNRATE}_{t - j} \\ {FEDFUNDS}_{t - j} \end{array}] + [\begin{array}{cccccccccccccccccccc} ε_{1, t} \\ ε_{2, t} \\ ε_{3, t} \end{array}] .$

For all $t$ , $ε_{t}$ is a series of independent 3-D normal innovations with a mean of 0 and fixed covariance $Σ$ = $I$ , the 3-D identity matrix. Assume that the prior distribution $vec ({[Φ_{1}, . . ., Φ_{4}, c]}^{'}) \sim Ν_{39} (μ, V)$ , where $μ$ is a 39-by-1 vector of means and $V$ is the 39-by-39 covariance matrix.

Create a normal conjugate prior model for the 3-D VAR(4) model parameters.

numseries = 3;
numlags = 4;
PriorMdl = normalbvarm(numseries,numlags)

PriorMdl = 
  normalbvarm with properties:

        Description: "3-Dimensional VAR(4) Model"
          NumSeries: 3
                  P: 4
        SeriesNames: ["Y1"    "Y2"    "Y3"]
    IncludeConstant: 1
       IncludeTrend: 0
      NumPredictors: 0
                 Mu: [39x1 double]
                  V: [39x39 double]
              Sigma: [3x3 double]
                 AR: {[3x3 double]  [3x3 double]  [3x3 double]  [3x3 double]}
           Constant: [3x1 double]
              Trend: [3x0 double]
               Beta: [3x0 double]
         Covariance: [3x3 double]

PriorMdl is a normalbvarm Bayesian VAR model object representing the prior distribution of the coefficients of the 3-D VAR(4) model. The command line display shows properties of the model. You can display properties by using dot notation.

Display the prior mean matrices of the four AR coefficients by setting each matrix in the cell to a variable.

AR1 = PriorMdl.AR{1}

AR1 = 3×3

     0     0     0
     0     0     0
     0     0     0

AR2 = PriorMdl.AR{2}

AR2 = 3×3

     0     0     0
     0     0     0
     0     0     0

AR3 = PriorMdl.AR{3}

AR3 = 3×3

     0     0     0
     0     0     0
     0     0     0

AR4 = PriorMdl.AR{4}

AR4 = 3×3

     0     0     0
     0     0     0
     0     0     0

normalbvarm centers all AR coefficients at 0 by default. The AR property is read only, but it is derived from the writeable property Mu.

Display the fixed innovations covariance $Σ$ .

PriorMdl.Covariance

ans = 3×3

     1     0     0
     0     1     0
     0     0     1

Covariance is a read-only property. To set the value $Σ$ , use the 'Sigma' name-value pair argument or specify the Sigma property by using dot notation. For example:

PriorMdl.Sigma = 4*eye(PriorMdl.NumSeries);

Specify Innovations Covariance Matrix

Open Live Script

Consider the 3-D VAR(4) model of Create Normal Conjugate Prior Model.

Suppose econometric theory dictates that

$Σ = [\begin{array}{cccccccccccccccccccc} 10^{- 5} & 0 & 10^{- 4} \\ 0 & 0.1 & - 0.2 \\ 10^{- 4} & - 0.2 & 1.6 \end{array}] .$

Create a normal conjugate prior model for the VAR model coefficients. Specify the value of $Σ$ .

numseries = 3;
numlags = 4;
Sigma = [10e-5 0 10e-4; 0 0.1 -0.2; 10e-4 -0.2 1.6]; 

PriorMdl = normalbvarm(numseries,numlags,'Sigma',Sigma)

PriorMdl = 
  normalbvarm with properties:

        Description: "3-Dimensional VAR(4) Model"
          NumSeries: 3
                  P: 4
        SeriesNames: ["Y1"    "Y2"    "Y3"]
    IncludeConstant: 1
       IncludeTrend: 0
      NumPredictors: 0
                 Mu: [39x1 double]
                  V: [39x39 double]
              Sigma: [3x3 double]
                 AR: {[3x3 double]  [3x3 double]  [3x3 double]  [3x3 double]}
           Constant: [3x1 double]
              Trend: [3x0 double]
               Beta: [3x0 double]
         Covariance: [3x3 double]

Because $Σ$ is fixed for normalbvarm prior models, PriorMdl.Sigma and PriorMdl.Covariance are equal.

PriorMdl.Sigma

ans = 3×3

    0.0001         0    0.0010
         0    0.1000   -0.2000
    0.0010   -0.2000    1.6000

PriorMdl.Covariance

ans = 3×3

    0.0001         0    0.0010
         0    0.1000   -0.2000
    0.0010   -0.2000    1.6000

Create Bayesian AR(2) Model with Normal Conjugate Coefficient Prior

Open Live Script

Consider a 1-D Bayesian AR(2) model for the daily NASDAQ returns from January 2, 1990 through December 31, 2001.

$y_{t} = c + ϕ_{1} y_{t - 1} + ϕ_{2} y_{t - 1} + ε_{t} .$

The coefficient prior distribution is $[\begin{array}{cccccccccccccccccccc} ϕ_{1} & ϕ_{2} & c \end{array}]^{'} | σ^{2} \sim N_{3} (μ, V)$ , where $μ$ is a 3-by-1 vector of coefficient means and $V$ is a 3-by-3 covariance matrix. Assume Var( $ε_{t}$ ) is 2.

Create a normal conjugate prior model for the AR(2) model parameters.

numseries = 1;
numlags = 2;
PriorMdl = normalbvarm(numseries,numlags,'Sigma',2)

PriorMdl = 
  normalbvarm with properties:

        Description: "1-Dimensional VAR(2) Model"
          NumSeries: 1
                  P: 2
        SeriesNames: "Y1"
    IncludeConstant: 1
       IncludeTrend: 0
      NumPredictors: 0
                 Mu: [3x1 double]
                  V: [3x3 double]
              Sigma: 2
                 AR: {[0]  [0]}
           Constant: 0
              Trend: [1x0 double]
               Beta: [1x0 double]
         Covariance: 2

Specify High Tightness for Lags and Response Names

Open Live Script

In the 3-D VAR(4) model of Create Normal Conjugate Prior Model, consider excluding lags 2 and 3 from the model.

You cannot exclude coefficient matrices from models, but you can specify high prior tightness on zero for coefficients that you want to exclude.

Create a normal conjugate prior model for the 3-D VAR(4) model parameters. Specify response variable names.

By default, AR coefficient prior means are zero. Specify high tightness values for lags 2 and 3 by setting their prior variances to 1e-6. Leave all other coefficient tightness values at their defaults:

1 for AR coefficient variances
1e3 for constant vector variances
0 for all coefficient covariances

numseries = 3;
numlags = 4;
seriesnames = ["INFL"; "UNRATE"; "FEDFUNDS"];
vPhi1 = ones(numseries,numseries);
vPhi2 = 1e-6*ones(numseries,numseries);
vPhi3 = 1e-6*ones(numseries,numseries);
vPhi4 = ones(numseries,numseries);
vc = 1e3*ones(3,1);
Vmat = [vPhi1 vPhi2 vPhi3 vPhi4 vc]';
V = diag(Vmat(:));
PriorMdl = normalbvarm(numseries,numlags,'SeriesNames',seriesnames,...
    'V',V)

PriorMdl = 
  normalbvarm with properties:

        Description: "3-Dimensional VAR(4) Model"
          NumSeries: 3
                  P: 4
        SeriesNames: ["INFL"    "UNRATE"    "FEDFUNDS"]
    IncludeConstant: 1
       IncludeTrend: 0
      NumPredictors: 0
                 Mu: [39x1 double]
                  V: [39x39 double]
              Sigma: [3x3 double]
                 AR: {[3x3 double]  [3x3 double]  [3x3 double]  [3x3 double]}
           Constant: [3x1 double]
              Trend: [3x0 double]
               Beta: [3x0 double]
         Covariance: [3x3 double]

Set Prior Hyperparameters for Minnesota Regularization

Open Live Script

normalbvarm options enable you to specify coefficient prior hyperparameter values directly, but bayesvarm options are well suited for tuning hyperparameters following the Minnesota regularization method.

Consider the 3-D VAR(4) model of Create Normal Conjugate Prior Model. The model contains 39 coefficients. For coefficient sparsity, create a normal conjugate Bayesian VAR model by using bayesvarm. Specify the following, a priori:

Each response is an AR(1) model, on average, with lag 1 coefficient 0.75.
Prior self-lag coefficients have variance 100. This large variance setting allows the data to influence the posterior more than the prior.
Prior cross-lag coefficients have variance 1. This small variance setting tightens the cross-lag coefficients to zero during estimation.
Prior coefficient covariances decay with increasing lag at a rate of 2 (that is, lower lags are more important than higher lags).
The innovations covariance $Σ$ = $I$ .

numseries = 3;
numlags = 4;
seriesnames = ["INFL"; "UNRATE"; "FEDFUNDS"];
Sigma = eye(numseries);
PriorMdl = bayesvarm(numseries,numlags,'ModelType','normal','Sigma',Sigma,...
    'Center',0.75,'SelfLag',100,'CrossLag',1,'Decay',2,'SeriesNames',seriesnames)

PriorMdl = 
  normalbvarm with properties:

        Description: "3-Dimensional VAR(4) Model"
          NumSeries: 3
                  P: 4
        SeriesNames: ["INFL"    "UNRATE"    "FEDFUNDS"]
    IncludeConstant: 1
       IncludeTrend: 0
      NumPredictors: 0
                 Mu: [39x1 double]
                  V: [39x39 double]
              Sigma: [3x3 double]
                 AR: {[3x3 double]  [3x3 double]  [3x3 double]  [3x3 double]}
           Constant: [3x1 double]
              Trend: [3x0 double]
               Beta: [3x0 double]
         Covariance: [3x3 double]

Display all prior coefficient means.

Phi1 = PriorMdl.AR{1}

Phi1 = 3×3

    0.7500         0         0
         0    0.7500         0
         0         0    0.7500

Phi2 = PriorMdl.AR{2}

Phi2 = 3×3

     0     0     0
     0     0     0
     0     0     0

Phi3 = PriorMdl.AR{3}

Phi3 = 3×3

     0     0     0
     0     0     0
     0     0     0

Phi4 = PriorMdl.AR{4}

Phi4 = 3×3

     0     0     0
     0     0     0
     0     0     0

Display a heatmap of the prior coefficient covariances for each response equation.

numexocoeffseqn = PriorMdl.IncludeConstant + ...
    PriorMdl.IncludeTrend + PriorMdl.NumPredictors;             % Number of exogenous coefficients per equation
numcoeffseqn = PriorMdl.NumSeries*PriorMdl.P + numexocoeffseqn; % Total number of coefficients per equation
arcoeffnames = strings(numseries,numlags,numseries);
for j = 1:numseries         % Equations
    for r = 1:numlags
        for k = 1:numseries % Response Variables
            arcoeffnames(k,r,j) = "\phi_{"+r+","+j+k+"}";
        end
    end
    arcoeffseqn = arcoeffnames(:,:,j);
    idx = ((j-1)*numcoeffseqn + 1):(numcoeffseqn*j) - numexocoeffseqn;
    Veqn = PriorMdl.V(idx,idx);
    figure
    heatmap(arcoeffseqn(:),arcoeffseqn(:),Veqn);
    title(sprintf('Equation of %s',seriesnames(j)))
end

Figure contains an object of type heatmap. The chart of type heatmap has title Equation of INFL.

Figure contains an object of type heatmap. The chart of type heatmap has title Equation of UNRATE.

Figure contains an object of type heatmap. The chart of type heatmap has title Equation of FEDFUNDS.

Work with Prior and Posterior Distributions

Open Live Script

Consider the 3-D VAR(4) model of Create Normal Conjugate Prior Model. Estimate the posterior distribution, and generate forecasts from the corresponding posterior predictive distribution.

Load and Preprocess Data

Load the US macroeconomic data set. Compute the inflation rate. Plot all response series.

load Data_USEconModel
seriesnames = ["INFL" "UNRATE" "FEDFUNDS"];
DataTimeTable.INFL = 100*[NaN; price2ret(DataTimeTable.CPIAUCSL)];

figure 
plot(DataTimeTable.Time,DataTimeTable{:,seriesnames})
legend(seriesnames)

Figure contains an axes object. The axes object contains 3 objects of type line. These objects represent INFL, UNRATE, FEDFUNDS.

Stabilize the unemployment and federal funds rates by applying the first difference to each series.

DataTimeTable.DUNRATE = [NaN; diff(DataTimeTable.UNRATE)];
DataTimeTable.DFEDFUNDS = [NaN; diff(DataTimeTable.FEDFUNDS)];
seriesnames(2:3) = "D" + seriesnames(2:3);

Remove all missing values from the data.

rmDataTimeTable = rmmissing(DataTimeTable);

Create Prior Model

Create a normal conjugate Bayesian VAR(4) prior model for the three response series. Specify the response variable names. Assume that the innovations covariance is the identity matrix.

numseries = numel(seriesnames);
numlags = 4;

PriorMdl = normalbvarm(numseries,numlags,'SeriesNames',seriesnames);

Estimate Posterior Distribution

Estimate the posterior distribution by passing the prior model and entire data series to estimate.

PosteriorMdl = estimate(PriorMdl,rmDataTimeTable{:,seriesnames},'Display','equation');

Bayesian VAR under normal priors and fixed Sigma
Effective Sample Size:          197
Number of equations:            3
Number of estimated Parameters: 39
                                                                                 VAR Equations                                                                                
           | INFL(-1)  DUNRATE(-1)  DFEDFUNDS(-1)  INFL(-2)  DUNRATE(-2)  DFEDFUNDS(-2)  INFL(-3)  DUNRATE(-3)  DFEDFUNDS(-3)  INFL(-4)  DUNRATE(-4)  DFEDFUNDS(-4)  Constant 
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
 INFL      |  0.1260     -0.4400        0.1049      0.3176     -0.0545        0.0440      0.4173      0.2421        0.0515      0.0247     -0.1639        0.0080      0.1064  
           | (0.1367)    (0.2673)      (0.0700)    (0.1551)    (0.2854)      (0.0739)    (0.1536)    (0.2811)      (0.0766)    (0.1605)    (0.2652)      (0.0708)    (0.1483) 
 DUNRATE   | -0.0236      0.4440        0.0350      0.0900      0.2295        0.0520     -0.0330      0.0567        0.0010      0.0298     -0.1665        0.0104     -0.0536  
           | (0.1367)    (0.2673)      (0.0700)    (0.1551)    (0.2854)      (0.0739)    (0.1536)    (0.2811)      (0.0766)    (0.1605)    (0.2652)      (0.0708)    (0.1483) 
 DFEDFUNDS | -0.1514     -1.3408       -0.2762      0.3275     -0.2971       -0.3041      0.2609     -0.6971        0.0130     -0.0692      0.1392       -0.1341     -0.3902  
           | (0.1367)    (0.2673)      (0.0700)    (0.1551)    (0.2854)      (0.0739)    (0.1536)    (0.2811)      (0.0766)    (0.1605)    (0.2652)      (0.0708)    (0.1483) 
 
     Innovations Covariance Matrix    
           | INFL  DUNRATE  DFEDFUNDS 
--------------------------------------
 INFL      |  1      0         0      
           |  (0)    (0)       (0)    
 DUNRATE   |  0      1         0      
           |  (0)    (0)       (0)    
 DFEDFUNDS |  0      0         1      
           |  (0)    (0)       (0)

Because the prior is conjugate for the data likelihood, the posterior is analytically tractable. By default, estimate uses the first four observations as a presample to initialize the model.

Generate Forecasts from Posterior Predictive Distribution

From the posterior predictive distribution, generate forecasts over a two-year horizon. Because sampling from the posterior predictive distribution requires the entire data set, specify the prior model in forecast instead of the posterior.

fh = 8;
rng(1); % For reproducibility
FY = forecast(PriorMdl,fh,rmDataTimeTable{:,seriesnames});

FY is an 8-by-3 matrix of forecasts.

Plot the end of the data set and the forecasts.

fp = rmDataTimeTable.Time(end) + calquarters(1:fh);
figure
plotdata = [rmDataTimeTable{end - 10:end,seriesnames}; FY];
plot([rmDataTimeTable.Time(end - 10:end); fp'],plotdata)
hold on
plot([fp(1) fp(1)],ylim,'k-.')
legend(seriesnames)
title('Data and Forecasts')
hold off

Figure contains an axes object. The axes object with title Data and Forecasts contains 4 objects of type line. These objects represent INFL, DUNRATE, DFEDFUNDS.

Compute Impulse Responses

Plot impulse response functions by passing posterior estimations to armairf.

armairf(PosteriorMdl.AR,[],'InnovCov',PosteriorMdl.Covariance)

Figure contains an axes object. The axes object with title Orthogonalized IRF of Variable 1, xlabel Observation Time, ylabel Response contains 3 objects of type line. These objects represent Shock to variable 1, Shock to variable 2, Shock to variable 3.

Figure contains an axes object. The axes object with title Orthogonalized IRF of Variable 2, xlabel Observation Time, ylabel Response contains 3 objects of type line. These objects represent Shock to variable 1, Shock to variable 2, Shock to variable 3.

Figure contains an axes object. The axes object with title Orthogonalized IRF of Variable 3, xlabel Observation Time, ylabel Response contains 3 objects of type line. These objects represent Shock to variable 1, Shock to variable 2, Shock to variable 3.

More About

expand all

Bayesian Vector Autoregression (VAR) Model

A Bayesian VAR model treats all coefficients and the innovations covariance matrix as random variables in the m-dimensional, stationary VARX(p) model. The model has one of the three forms described in this table.

Model	Equation
Reduced-form VAR(p) in difference-equation notation	$y_{t} = Φ_{1} y_{t - 1} + ... + Φ_{p} y_{t - p} + c + δ t + Β x_{t} + ε_{t} .$
Multivariate regression	$y_{t} = Z_{t} λ + ε_{t} .$
Matrix regression	$y_{t} = Λ^{'} z_{t}^{'} + ε_{t} .$

For each time t = 1,...,T:

y_t is the m-dimensional observed response vector, where m = numseries.
Φ₁,…,Φ_p are the m-by-m AR coefficient matrices of lags 1 through p, where p = numlags.
c is the m-by-1 vector of model constants if IncludeConstant is true.
δ is the m-by-1 vector of linear time trend coefficients if IncludeTrend is true.
Β is the m-by-r matrix of regression coefficients of the r-by-1 vector of observed exogenous predictors x_t, where r = NumPredictors. All predictor variables appear in each equation.
$z_{t} = [\begin{matrix} y_{t - 1}^{'} & y_{t - 2}^{'} & \dots & y_{t - p}^{'} & 1 & t & x_{t}^{'} \end{matrix}],$ which is a 1-by-(mp + r + 2) vector, and Z_t is the m-by-m(mp + r + 2) block diagonal matrix

$[\begin{matrix} z_{t} & 0_{z} & \dots & 0_{z} \\ 0_{z} & z_{t} & \dots & 0_{z} \\ ⋮ & ⋮ & ⋱ & ⋮ \\ 0_{z} & 0_{z} & 0_{z} & z_{t} \end{matrix}],$
where 0_z is a 1-by-(mp + r + 2) vector of zeros.
$Λ = {[\begin{matrix} Φ_{1} & Φ_{2} & \dots & Φ_{p} & c & δ & Β \end{matrix}]}^{'}$ , which is an (mp + r + 2)-by-m random matrix of the coefficients, and the m(mp + r + 2)-by-1 vector λ = vec(Λ).
ε_t is an m-by-1 vector of random, serially uncorrelated, multivariate normal innovations with the zero vector for the mean and the m-by-m matrix Σ for the covariance. This assumption implies that the data likelihood is

$ℓ (Λ, Σ | y, x) = \prod_{t = 1}^{T} f (y_{t}; Λ, Σ, z_{t}),$
where f is the m-dimensional multivariate normal density with mean z_tΛ and covariance Σ, evaluated at y_t.

Before considering the data, you impose a joint prior distribution assumption on (Λ,Σ), which is governed by the distribution π(Λ,Σ). In a Bayesian analysis, the distribution of the parameters is updated with information about the parameters obtained from the data likelihood. The result is the joint posterior distribution π(Λ,Σ|Y,X,Y₀), where:

Y is a T-by-m matrix containing the entire response series {y_t}, t = 1,…,T.
X is a T-by-m matrix containing the entire exogenous series {x_t}, t = 1,…,T.
Y₀ is a p-by-m matrix of presample data used to initialize the VAR model for estimation.

Normal Conjugate Prior Model

The normal conjugate prior model, outlined in [1], is an m-D Bayesian VAR model in which the innovations covariance matrix Σ is known and fixed, while the coefficient vector λ = vec(Λ) has the prior distribution

$λ ~ N_{m (m p + r + 1_{c} + 1_{δ})} (μ, V),$

where:

r = NumPredictors.
1_c is 1 if IncludeConstant is true, and 0 otherwise.
1_δ is 1 if IncludeTrend is true, and 0 otherwise.

The posterior distribution is proper and analytically tractable.

$λ | y_{t}, x_{t} ~ N_{m (m p) + r + 1_{c} + 1_{δ}} (\bar{μ}, \bar{V}),$

where:

$\bar{μ} = {(V^{- 1} + \sum_{t = 1}^{T} Z_{t}^{'} Σ^{- 1} Z_{t})}^{- 1} (V^{- 1} μ + \sum_{t = 1}^{T} Z_{t}^{'} Σ^{- 1} y_{t}) .$
$\bar{V} = {(V^{- 1} + \sum_{t = 1}^{T} Z_{t}^{'} Σ^{- 1} Z_{t})}^{- 1} .$

References

[1] Litterman, Robert B. "Forecasting with Bayesian Vector Autoregressions: Five Years of Experience." Journal of Business and Economic Statistics 4, no. 1 (January 1986): 25–38. https://doi.org/10.2307/1391384.

Version History

Introduced in R2020a

normalbvarm

Description

Creation

Syntax

Description

Input Arguments

numseries — Number of time series m 1 (default) | positive integer

numlags — Number of lagged responses nonnegative integer

Properties

Model Characteristics and Dimensionality

Description — Model description string scalar | character vector

NumSeries — Number of time series m positive integer

P — Multivariate autoregressive polynomial order nonnegative integer

SeriesNames — Response series names string vector | cell array of character vectors

IncludeConstant — Flag for including model constant c true (default) | false

IncludeTrend — Flag for including linear time trend term δt false (default) | true

NumPredictors — Number of exogenous predictor variables in model regression component 0 (default) | nonnegative integer

Distribution Hyperparameters

Mu — Mean of multivariate normal prior on λ zeros(NumSeries*(NumSeries*P + IncludeIntercept + IncludeTrend + NumPredictors),1) (default) | numeric vector

V — Conditional covariance matrix of multivariate normal prior on λ eye(NumSeries*(NumSeries*P + IncludeIntercept + IncludeTrend + NumPredictors)) (default) | symmetric, positive definite numeric matrix

Sigma — Fixed innovations covariance matrix Σ eye(NumSeries) (default) | positive definite numeric matrix

VAR Model Parameters Derived from Distribution Hyperparameters

AR — Distribution mean of autoregressive coefficient matrices Φ1,…,Φp cell vector of numeric matrices

Constant — Distribution mean of model constant c numeric vector

Trend — Distribution mean of linear time trend δ numeric vector

Beta — Distribution mean of regression coefficient matrix Β numeric matrix

Covariance — Fixed innovations covariance matrix Σ positive definite numeric matrix

Object Functions

Examples

Create Normal Conjugate Prior Model

Specify Innovations Covariance Matrix

Create Bayesian AR(2) Model with Normal Conjugate Coefficient Prior

Specify High Tightness for Lags and Response Names

Set Prior Hyperparameters for Minnesota Regularization

Work with Prior and Posterior Distributions

More About

Bayesian Vector Autoregression (VAR) Model

Normal Conjugate Prior Model

References

Version History

See Also

Functions

Objects

`numseries` — Number of time series m
`1` (default) | positive integer

`numlags` — Number of lagged responses
nonnegative integer

`Description` — Model description
string scalar | character vector

`NumSeries` — Number of time series m
positive integer

`P` — Multivariate autoregressive polynomial order
nonnegative integer

`SeriesNames` — Response series names
string vector | cell array of character vectors

`IncludeConstant` — Flag for including model constant c
`true` (default) | `false`

`IncludeTrend` — Flag for including linear time trend term δt
`false` (default) | `true`

`NumPredictors` — Number of exogenous predictor variables in model regression component
`0` (default) | nonnegative integer

`Mu` — Mean of multivariate normal prior on λ
`zeros(NumSeries(NumSeriesP + IncludeIntercept + IncludeTrend + NumPredictors),1)` (default) | numeric vector

`V` — Conditional covariance matrix of multivariate normal prior on λ
`eye(NumSeries(NumSeriesP + IncludeIntercept + IncludeTrend + NumPredictors))` (default) | symmetric, positive definite numeric matrix

`Sigma` — Fixed innovations covariance matrix Σ
`eye(NumSeries)` (default) | positive definite numeric matrix

`AR` — Distribution mean of autoregressive coefficient matrices Φ₁,…,Φ_p
cell vector of numeric matrices

`Constant` — Distribution mean of model constant c
numeric vector

`Trend` — Distribution mean of linear time trend δ
numeric vector

`Beta` — Distribution mean of regression coefficient matrix Β
numeric matrix

`Covariance` — Fixed innovations covariance matrix Σ
positive definite numeric matrix