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The paper compares multi-period forecasting performances by direct and iterated method using Bayesian vector autoregressive (VAR) models.

The paper adopts Bayesian VAR models with three different priors – independent Normal-Wishart prior, the Minnesota prior and the stochastic search variable selection (SSVS). Monte Carlo simulations are conducted to compare forecasting performances. An empirical study using US macroeconomic data are shown as an illustration.

In theory direct forecasts are more efficient asymptotically and more robust to model misspecification than iterated forecasts, and iterated forecasts tend to bias but more efficient if the one-period ahead model is correctly specified. From the results of the Monte Carlo simulations, iterated forecasts tend to outperform direct forecasts, particularly with longer lag model and with longer forecast horizons. Implementing SSVS prior generally improves forecasting performance over unrestricted VAR model for either nonstationary or stationary data.

The paper finds that iterated forecasts using model with the SSVS prior generally best outperform, suggesting that the SSVS restrictions on insignificant parameters alleviates over-parameterized problem of VAR in one-step ahead forecast and thus offers an appreciable improvement in forecast performance of iterated forecasts.

This paper investigates the validity of the expectations hypothesis for the term structure of interest rates in the context of the deposit interest rates in Kuwait. The data set covers average inter local bank interest rates on deposits of Kuwaiti Dinar (KD) with maturity of one, three and six months from the period June 1994 to August 2008. We utilize Johansen procedures to examine the relationship between spot and forward rates. Our findings show that the spot and forward rates are cointegrated for all cases, the one month interest rates, the three month interest rates as well as the six month interest rates. The explanation of this relationship indicates that the expectations hypothesis of the term structure of interest rates is accepted for the case of Kuwait.