Asymptotic and bootstrap prediction regions for vector autoregression

Small sample properties of asymptotic and bootstrap prediction regions for VAR models are evaluated and compared. Monte Carlo simulations reveal that the bootstrap prediction region based on the percentile-t method outperforms its asymptotic and other bootstrap alternatives in small samples. It provides the most accurate assessment of future uncertainty under both normal and non-normal innovations. The use of an asymptotic prediction region may result in a serious under-estimation of future uncertainty when the sample size is small. When the model is near non-stationary, the use of the bootstrap region based on the percentile-t method is recommended, although extreme care should be taken when it is used for medium to long-term forecasting.