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Does varm use the current or lagged X

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Martijn Riemers
Martijn Riemers on 20 Jun 2020
Answered: Pratyush Roy on 17 Feb 2021
I'm trying to fit a yield dataset by means of a VARX model with the following formulation:
where is a vector of yields of different maturities and is a vector of factors from a macroeconomic dataset. Looking at the `varm` documentation leads me to believe only current values of will be used for estimation of .

Answers (1)

Pratyush Roy
Pratyush Roy on 17 Feb 2021
Hi Martijn,
For an autoregressive model, the current output is dependent on past outputs and the present input. For the given equation, the present output depends on past output as well as past input.
As a workaround, the VARMA model can be used to model dynamical systems as described in the question. The link here shows functionalities like arma2ar which might be helpful to realise such models.
Hope this helps!

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