A Spatial Prior for Bayesian Vector Autoregressive Models

In this paper we develop a Bayesian prior motivated by cross‐sectional spatial autoregressive models for use in time‐series vector autoregressive forecasting involving spatial variables. We compare forecast accuracy of the proposed spatial prior to that from a vector autoregressive model relying on the Minnesota prior and find a significant improvement. In addition to a spatially motivated prior variance as in LeSage and Pan (1995) we develop a set of prior means based on spatial contiguity. A Theil‐Goldberger estimator may be used for the proposed model making it easy to implement.