Bivariate First-Order Vector Autoregression Model with Correlated Random Shocks

This Demonstration generates and visualizes a bivariate first-order vector autoregression (VAR) model with a symmetric coefficient matrix and correlated random shocks.
The model is , where , , and . This simplified case with symmetric coefficient matrix is chosen to emphasize each coefficient's effect. The case where is the standard VAR(1) model with symmetric coefficient matrix. Positive and negative correlations between random shocks are included since they are widely used in economic and financial analysis as spillovers. The blue curve shows and the purple curve shows .
  • Contributed by: N. Baris Vardar
  • Paris School of Economics, Université Paris, 1 Panthéon Sorbonne

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