Forecasting Financial and Macroeconomic Variables Using an Adaptive Parameter VAR-KF Model

Abstract

The primary objective of this article is to present an adaptive parameter VAR-KF technique (APVAR-KF) to forecast stock market performance and macroeconomic factors. The method exploits a vector autoregressive model as a system identification technique, and the Kalman filter is served as a recursive state parameter estimation tool. A further development was designed by incorporating the GARCH model to quantify an automatic observation covariance matrix in the Kalman filter step. To verify the efficiency of our proposed method, we conducted an experimental simulation applied to the main stock exchange index, real effective exchange rate and consumer price index of Thailand and Indonesia from January 1997 to May 2021. The APVAR-KF method is generally shown to have a superior performance relative to the conventional VAR(1) model and the VAR-KF model with constant parameters.