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I just estimated a Vector Autoregressive Model with 6 lags and 10 variables in R. My goal is to simulate the given original time series (on which the model parameters were estimated) to see how the model fits.

As the simulation in R doesn't work (but this is not the problem) I'd like to do the simulation with excel. I know how to use the estimated parameters and the previous values of the time series (respective the number of lags) but my problem is how to generate the right white noise for the single time series.

My first attempt was generating individual white noise vectors with mean=0 and sigma=squared Standard error of residual (got that from the R-Output of estimation) and it seems to work for some of the variables. But I have the feeling that this is not the right way to do it.

So, can you tell me how I generate the error terms for the simulation of the time series? Do I have to use the covariance matrix of residuals?

As the estimation and simulation of multivariate time series is just step 1 of 3 in my masters thesis (and time is running) I appreciate every hint I can get. All my books and papers couldn't help me with this question so I really hope some of you might have an idea.

EDIT: Thanks for the quick answer. Regarding the simulation with R: I tried the VAR.sim() command from the package tsDyn.

simulation<-VAR.sim(h, innov=rmnorm(n, mean=0, varcov=m), n=1095, lag=6, include="none", starting=v)

Explanation: I want to simulate a VAR(6) model and determined the matrix h ($10 \times 60$ matrix) with the estimated coefficients for all variables and lags. m is the covariance matrix of the residuals (also output from the estimation). I want to simulate 1095 days (n) without constant/trend (include="none") and give in v starting values for days 1 to 6 for all the 10 variables.

The hint for using the Command is:

VAR.sim(B, n=200, lag=1, include = c("const", "trend","none", "both"), starting=NULL, innov=rmnorm(n, mean=0, varcov=varcov), varcov=diag(1,nrow(B)), show.parMat=FALSE)

But the output doesn't fit to any of my original time series and I don't get what I'm doing wrong.

Do you have any idea what could be wrong? Or if there's another easy way to simulate a VAR(p)-model?

Thanks in advance!

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To mimic the behaviour of the ten time series you have, you need to use the estimated contemporaneous covariance matrix of model errors when simulating the errors. Using a diagonal matrix instead (which is approximately what you get when you simulate the ten univariate error series separately) will not work as needed.

By the way, why doesn't the simulation in R work? You can simulate multivariate normal errors using the function mvrnorm from the MASS package.

Edit (to respond to an edit of the OP):
Why the output does not "fit" the original series: it does not have to, visually. But if you estimate a VAR(6) model, you should be getting very similar coefficient matrices and very similar contemporaneous covariance matrix of errors. That shows the process is generated as it should be, but due to different random shocks you get potentially very different trajectories.

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  • $\begingroup$ During various simulations another question appeared and I hope you can give me another hint! The mvrnorm command needs a semi-definit covariance matrix, but the covariance matrix of the model errors which is estimated in the VAR-command contains negative values. Is there a away to still generate multivariate random errors with this covariance matrix? When I use the identity matrix instead (which is used as an alternative to the covariance matrix in the VAR.sim-command) my results are worse in comparison to the simulation with the errors based on the partially negative covariance matrix. $\endgroup$ – Blair92 Apr 20 '17 at 13:04
  • $\begingroup$ @Blair92, the covariance matrix need to be nonnegative definite but that does not preclude some negative elements in it. $\endgroup$ – Richard Hardy Apr 20 '17 at 13:27

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