rtime-seriesdecompositioneconomics
Historical Decomposition In R
I'm currently trying to run a historical decomposition on my data series in R.
I've read a ton of papers and they all provide the following explanation of how to do a historical decomposition:
Where the sum on the right hand side is a "dynamic forecast" or "base projection" of Yt+k conditional on info available at time t. The sum on the left hand side is the difference between the actual series and the base projection due to innovation in variables in periods t+1 to t+k
I get very confused about the base projection and am not sure what data is being used!
My Attempts.
I've got a 6 variable VAR, with 55 observations. I get the structural form of the model using a Cholesky Decomposition. Once I've done this I use the Phi, function to get the structural moving average representation of the SVAR. I then store this Phi "array" so i can use it later.
varFT <- VAR(Enddata[,c(2,3,4,5,6,7)], p = 4, type = c("const"))
Amat <- diag(6)
Amat
Bmat <- diag(6)
Bmat[1,1] <- NA
Bmat[2,2] <- NA
Bmat[3,3] <- NA
Bmat[4,4] <- NA
Bmat[5,5] <- NA
Bmat[6,6] <- NA
#play around with col/row names to make them pretty/understandable.
colnames(Bmat) <- c("G", "FT", "T","R", "P", "Y")
rownames(Bmat) <- c("G", "FT", "T", "R", "P", "Y")
Amat[1,5] <- 0
Amat[1,4] <- 0
Amat[1,3] <- 0
#Make Amat lower triangular, leave Bmat as diag.
Amat[5,1:4] <- NA
Amat[4, 1:3] <- NA
Amat[3,1:2] <- NA
Amat[2,1] <- NA
Amat[6,1:5] <- NA
svarFT <- SVAR(varFT, estmethod = c("scoring"), Amat = Amat, Bmat = Bmat)
MA <- Phi(svarFT, nstep = 55)
MAarray <- function(x){
resid_store = array(0, dim=c(6,6,54))
resid_store[,,1] = (Phi(x, nstep = 54))[,,1]
for (d in 1:54){
resid_store[,,d] = Phi(x,nstep = 54)[,,d]
}
return(resid_store)
}
Part1 <-MAarray(MA)
What I think i've done is got the info I need for the base projection, but I've got no idea where to go from here.
GOAL What I want to do, is to assess the effects of the 1st variable in the VAR is on the 6th variable in the VAR, over the whole sample period.
Any help would be appreciated.
Solution
I translated the function VARhd from Cesa-Bianchi's Matlab Toolbox into R code. My function is compatible with the VAR function from the vars packages in R.
The original function in MATLAB:
function HD = VARhd(VAR,VARopt)
% =======================================================================
% Computes the historical decomposition of the times series in a VAR
% estimated with VARmodel and identified with VARir/VARfevd
% =======================================================================
% HD = VARhd(VAR,VARopt)
% -----------------------------------------------------------------------
% INPUTS
% - VAR: VAR results obtained with VARmodel (structure)
% - VARopt: options of the IRFs (see VARoption)
% OUTPUT
% - HD(t,j,k): matrix with 't' steps, containing the IRF of 'j' variable
% to 'k' shock
% - VARopt: options of the IRFs (see VARoption)
% =======================================================================
% Ambrogio Cesa Bianchi, April 2014
% ambrogio.cesabianchi@gmail.com
%% Check inputs
%===============================================
if ~exist('VARopt','var')
error('You need to provide VAR options (VARopt from VARmodel)');
end
%% Retrieve and initialize variables
%=============================================================
invA = VARopt.invA; % inverse of the A matrix
Fcomp = VARopt.Fcomp; % Companion matrix
det = VAR.det; % constant and/or trends
F = VAR.Ft'; % make comparable to notes
eps = invA\transpose(VAR.residuals); % structural errors
nvar = VAR.nvar; % number of endogenous variables
nvarXeq = VAR.nvar * VAR.nlag; % number of lagged endogenous per equation
nlag = VAR.nlag; % number of lags
nvar_ex = VAR.nvar_ex; % number of exogenous (excluding constant and trend)
Y = VAR.Y; % left-hand side
X = VAR.X(:,1+det:nvarXeq+det); % right-hand side (no exogenous)
nobs = size(Y,1); % number of observations
%% Compute historical decompositions
%===================================
% Contribution of each shock
invA_big = zeros(nvarXeq,nvar);
invA_big(1:nvar,:) = invA;
Icomp = [eye(nvar) zeros(nvar,(nlag-1)*nvar)];
HDshock_big = zeros(nlag*nvar,nobs+1,nvar);
HDshock = zeros(nvar,nobs+1,nvar);
for j=1:nvar; % for each variable
eps_big = zeros(nvar,nobs+1); % matrix of shocks conformable with companion
eps_big(j,2:end) = eps(j,:);
for i = 2:nobs+1
HDshock_big(:,i,j) = invA_big*eps_big(:,i) + Fcomp*HDshock_big(:,i-1,j);
HDshock(:,i,j) = Icomp*HDshock_big(:,i,j);
end
end
% Initial value
HDinit_big = zeros(nlag*nvar,nobs+1);
HDinit = zeros(nvar, nobs+1);
HDinit_big(:,1) = X(1,:)';
HDinit(:,1) = Icomp*HDinit_big(:,1);
for i = 2:nobs+1
HDinit_big(:,i) = Fcomp*HDinit_big(:,i-1);
HDinit(:,i) = Icomp *HDinit_big(:,i);
end
% Constant
HDconst_big = zeros(nlag*nvar,nobs+1);
HDconst = zeros(nvar, nobs+1);
CC = zeros(nlag*nvar,1);
if det>0
CC(1:nvar,:) = F(:,1);
for i = 2:nobs+1
HDconst_big(:,i) = CC + Fcomp*HDconst_big(:,i-1);
HDconst(:,i) = Icomp * HDconst_big(:,i);
end
end
% Linear trend
HDtrend_big = zeros(nlag*nvar,nobs+1);
HDtrend = zeros(nvar, nobs+1);
TT = zeros(nlag*nvar,1);
if det>1;
TT(1:nvar,:) = F(:,2);
for i = 2:nobs+1
HDtrend_big(:,i) = TT*(i-1) + Fcomp*HDtrend_big(:,i-1);
HDtrend(:,i) = Icomp * HDtrend_big(:,i);
end
end
% Quadratic trend
HDtrend2_big = zeros(nlag*nvar, nobs+1);
HDtrend2 = zeros(nvar, nobs+1);
TT2 = zeros(nlag*nvar,1);
if det>2;
TT2(1:nvar,:) = F(:,3);
for i = 2:nobs+1
HDtrend2_big(:,i) = TT2*((i-1)^2) + Fcomp*HDtrend2_big(:,i-1);
HDtrend2(:,i) = Icomp * HDtrend2_big(:,i);
end
end
% Exogenous
HDexo_big = zeros(nlag*nvar,nobs+1);
HDexo = zeros(nvar,nobs+1);
EXO = zeros(nlag*nvar,nvar_ex);
if nvar_ex>0;
VARexo = VAR.X_EX;
EXO(1:nvar,:) = F(:,nvar*nlag+det+1:end); % this is c in my notes
for i = 2:nobs+1
HDexo_big(:,i) = EXO*VARexo(i-1,:)' + Fcomp*HDexo_big(:,i-1);
HDexo(:,i) = Icomp * HDexo_big(:,i);
end
end
% All decompositions must add up to the original data
HDendo = HDinit + HDconst + HDtrend + HDtrend2 + HDexo + sum(HDshock,3);
%% Save and reshape all HDs
%==========================
HD.shock = zeros(nobs+nlag,nvar,nvar); % [nobs x shock x var]
for i=1:nvar
for j=1:nvar
HD.shock(:,j,i) = [nan(nlag,1); HDshock(i,2:end,j)'];
end
end
HD.init = [nan(nlag-1,nvar); HDinit(:,1:end)']; % [nobs x var]
HD.const = [nan(nlag,nvar); HDconst(:,2:end)']; % [nobs x var]
HD.trend = [nan(nlag,nvar); HDtrend(:,2:end)']; % [nobs x var]
HD.trend2 = [nan(nlag,nvar); HDtrend2(:,2:end)']; % [nobs x var]
HD.exo = [nan(nlag,nvar); HDexo(:,2:end)']; % [nobs x var]
HD.endo = [nan(nlag,nvar); HDendo(:,2:end)']; % [nobs x var]
My version in R (based on the vars package):
VARhd <- function(Estimation){
## make X and Y
nlag <- Estimation$p # number of lags
DATA <- Estimation$y # data
QQ <- VARmakexy(DATA,nlag,1)
## Retrieve and initialize variables
invA <- t(chol(as.matrix(summary(Estimation)$covres))) # inverse of the A matrix
Fcomp <- companionmatrix(Estimation) # Companion matrix
#det <- c_case # constant and/or trends
F1 <- t(QQ$Ft) # make comparable to notes
eps <- ginv(invA) %*% t(residuals(Estimation)) # structural errors
nvar <- Estimation$K # number of endogenous variables
nvarXeq <- nvar * nlag # number of lagged endogenous per equation
nvar_ex <- 0 # number of exogenous (excluding constant and trend)
Y <- QQ$Y # left-hand side
#X <- QQ$X[,(1+det):(nvarXeq+det)] # right-hand side (no exogenous)
nobs <- nrow(Y) # number of observations
## Compute historical decompositions
# Contribution of each shock
invA_big <- matrix(0,nvarXeq,nvar)
invA_big[1:nvar,] <- invA
Icomp <- cbind(diag(nvar), matrix(0,nvar,(nlag-1)*nvar))
HDshock_big <- array(0, dim=c(nlag*nvar,nobs+1,nvar))
HDshock <- array(0, dim=c(nvar,(nobs+1),nvar))
for (j in 1:nvar){ # for each variable
eps_big <- matrix(0,nvar,(nobs+1)) # matrix of shocks conformable with companion
eps_big[j,2:ncol(eps_big)] <- eps[j,]
for (i in 2:(nobs+1)){
HDshock_big[,i,j] <- invA_big %*% eps_big[,i] + Fcomp %*% HDshock_big[,(i-1),j]
HDshock[,i,j] <- Icomp %*% HDshock_big[,i,j]
}
}
HD.shock <- array(0, dim=c((nobs+nlag),nvar,nvar)) # [nobs x shock x var]
for (i in 1:nvar){
for (j in 1:nvar){
HD.shock[,j,i] <- c(rep(NA,nlag), HDshock[i,(2:dim(HDshock)[2]),j])
}
}
return(HD.shock)
}
As input argument you have to use the out of the VAR function from the vars packages in R. The function returns a 3-dimensional array: number of observations x number of shocks x number of variables.
(Note: I didn't translate the entire function, e.g. I omitted the case of exogenous variables.)
To run it, you need two additional functions which were also translated from Bianchi's Toolbox:
VARmakexy <- function(DATA,lags,c_case){
nobs <- nrow(DATA)
#Y matrix
Y <- DATA[(lags+1):nrow(DATA),]
Y <- DATA[-c(1:lags),]
#X-matrix
if (c_case==0){
X <- NA
for (jj in 0:(lags-1)){
X <- rbind(DATA[(jj+1):(nobs-lags+jj),])
}
} else if(c_case==1){ #constant
X <- NA
for (jj in 0:(lags-1)){
X <- rbind(DATA[(jj+1):(nobs-lags+jj),])
}
X <- cbind(matrix(1,(nobs-lags),1), X)
} else if(c_case==2){ # time trend and constant
X <- NA
for (jj in 0:(lags-1)){
X <- rbind(DATA[(jj+1):(nobs-lags+jj),])
}
trend <- c(1:nrow(X))
X <-cbind(matrix(1,(nobs-lags),1), t(trend))
}
A <- (t(X) %*% as.matrix(X))
B <- (as.matrix(t(X)) %*% as.matrix(Y))
Ft <- ginv(A) %*% B
retu <- list(X=X,Y=Y, Ft=Ft)
return(retu)
}
companionmatrix <- function (x)
{
if (!(class(x) == "varest")) {
stop("\nPlease provide an object of class 'varest', generated by 'VAR()'.\n")
}
K <- x$K
p <- x$p
A <- unlist(Acoef(x))
companion <- matrix(0, nrow = K * p, ncol = K * p)
companion[1:K, 1:(K * p)] <- A
if (p > 1) {
j <- 0
for (i in (K + 1):(K * p)) {
j <- j + 1
companion[i, j] <- 1
}
}
return(companion)
}
Here is a short example:
library(vars)
data(Canada)
ab<-VAR(Canada, p = 2, type = "both")
HD <- VARhd(Estimation=ab)
HD[,,1] # historical decomposition of the first variable (employment)
Here is a plot in excel:
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