Hands-On Machine Learning for Algorithmic Trading

The vector autoregressive (VAR) model

We will see how the vector autoregressive VAR(p) model extends the AR(p) model to k series by creating a system of k equations where each contains p lagged values of all k series. In the simplest case, a VAR(1) model for k=2 takes the following form:

This model can be expressed somewhat more concisely in matrix form:

The coefficients on the own lags provide information about the dynamics of the series itself, whereas the cross-variable coefficients offer some insight into the interactions across the series. ...