Stochastic volatility models with ARMA innovations: An application to G7 inflation forecasts

Vol: 
32/2018
Author name: 
Zhang B
Chan JCC
Cross JL
Year: 
2018
Month: 
June
Abstract: 

We introduce a new class of stochastic volatility models with autoregressive moving average (ARMA) innovations. The conditional mean process has a flexible form that can accommodate both a state space representation and a conventional dynamic regression. The ARMA component introduces serial dependence which renders standard Kalman filter techniques not directly applicable. To overcome this hurdle we develop an efficient posterior simulator that builds on recently developed precision based algorithms. We assess the usefulness of these new models in an inflation forecasting exercise across all G7 economies. We find that the new models generally provide competitive point and density forecasts compared to standard benchmarks, and are especially useful for Canada, France, Italy and the US.

Publication file: 

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