Factor Vector Autoregressive Estimation of Heteroskedastic Persistent and Non Persistent Processes Subject to Structural Breaks

In the paper a general framework for large scale modeling of macroeconomic and …nancial time series is introduced. The proposed approach is characterized by simplicity of implementation, performing well independently of persistence and heteroskedasticity properties, accounting for common deterministic and stochastic factors. Monte Address for correspondence: Claudio Morana, Università di Milano Bicocca, Facoltà di Economia, Dipartimento di Economia Politica, Piazza dell’Ateneo Nuovo 1, 20126, Milano, Italy. E-mail: [email protected]. yA previous version of the paper was presented at the Nineteenth and Twenty …rst Annual Symposium of the Society for Non Linear Dynamics and Econometrics, the Fourth Annual Conference of the Society for Financial Econometrics, the 65th European Meeting of the Econometric Society (ESEM), the 2011 NBER-NSF Time Series Conference, and the 5th CSDA International Conference on Computational and Financial Econometrics. The author is grateful to conference participants, N. Cassola, F.C. Bagliano, and R.T. Baillie for constructive comments. zAs Mitsuo Aida wrote in one of his poems, somewhere in life/ there is a path/ that must be taken regardless of how hard we try to avoid it/ at that time, all one can do is remain silent and walk the path/ neither complaining nor whining/ saying nothing and walking on/ just saying nothing and showing no tears/ it is then,/ as human beings,/ that the roots of our souls grow deeper. This paper is dedicated to the loving memory of A.