Efficient selection of hyperparameters in large Bayesian VARs using automatic differentiation

Abstract

Large Bayesian vector autoregressions with the natural conjugate prior are now routinely used for forecasting and structural analysis. It has been shown that selecting the prior hyperparameters in a data‐driven manner can often substantially improve forecast performance. We propose a computationally efficient method to obtain the optimal hyperparameters based on automatic differentiation, which is an efficient way to compute derivatives. Using a large US data set, we show that using the optimal hyperparameter values leads to substantially better forecast performance. Moreover, the proposed method is much faster than the conventional grid‐search approach, and is applicable in high‐dimensional..