Variance Decomposition Function

[munna99185]

Variance decompositions offer a slightly different method for examining VAR system dynamics. They give the proportion of the movements in the dependent variables that are due to their ‘own’ shocks, versus shocks to the other variables. A shock to the ith variable will directly affect that variable of course, but it will also be transmitted to all of the other variables in the system through the dynamic structure of the VAR.

Sayed Farrukh Ahmed
Assistant Professor
Faculty of Business & Economics
Daffodil International University