BoE paper questions dominance of Normal distribution
VAR model featuring 'fat tails' performs better
Research published on May 29 by the Bank of England (BoE) has struck a blow against macroeconomic modelling using the Normal distribution, instead emphasising the superior performance of the t distribution.
The working paper, Forecasting with VAR models: fat tails and stochastic volatility, by Ching-Wai (Jeremy) Chiu, Haroon Mumtaz and Gabor Pinter, features a vector autoregression (VAR) based on the t distribution, which allows for a greater probability of extreme events via its "fat tails"
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