The Vector Autoregression (VAR) Model is a statistical model used to capture the linear interdependencies among multiple time series. It generalizes the univariate autoregressive model by allowing for more than one evolving variable, which makes it particularly useful in econometrics and finance. In a VAR model, each variable is expressed as a linear function of its own lagged values and the lagged values of all other variables in the system. Mathematically, a VAR model of order can be represented as:
where is a vector of the variables at time , are coefficient matrices, and is a vector of error terms. The VAR model is widely used for forecasting and understanding the dynamic behavior of economic indicators, as it provides insights into the relationship and influence between different time series.
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