Title: Bayesian state-space model with time varying parameters and stochastic volatility in identification of financial shocks
Authors: Seyma Vahap - University of Strathclyde (United Kingdom) [presenting]
Abstract: We examine the nature and evolving features of exogenous shocks to credit spreads as a source of business cycle fluctuations by allowing for a dynamic feedback between macroeconomics and finance within a Bayesian time varying parameter structural vector autoregressive (SVAR) model with stochastic volatility. We identify an unanticipated increase in credit spread that can be considered exogenous with respect to both macroeconomic and financial variables using time and sign restrictions. Using U.S. data, we find that these shocks have contributed to substantial contraction is economic activity. The results also show that innovations to credit spread cause ambiguity in the response of inflation and stock returns.