The vector innovation structural time series framework: a simple approach to multivariate forecasting

The vector innovation structural time series framework is proposed as a way of modelling a set of related time series. Like all multivariate approaches, the aim is to exploit potential inter-series dependencies to improve the fit and forecasts. Equations that describe the evolution of these components through time are used as the sole way of representing the inter-temporal dependencies. The approach is illustrated on a bivariate data set comprising Australian exchange rates of the UK pound and US dollar. Its forecasting capacity is compared to other common uni- and multivariate approaches in an experiment using time series from a large macroeconomic database.