2.1. The VAR Model:
The vector autoregressive (VAR) model was introduced in 1980 by Sim.
According to (Christopher Sim and Litterman, 1980) the VAR model
outperforms a structural equation model in terms of prediction accuracy.
In this study, we consider a number of endogenous variables in the VAR
model, there is a superficial resemblance to structural equation
modeling. However, the lagged values of each endogenous variable in this
model account for the current values of the same. In most cases, the
model does not include any independent variables. Sim built the VAR
model on the idea that the exogenous and endogenous variables occur
simultaneously. All of the model’s variables are assumed to be
endogenous and to have some sort of mutual influence.