Score-Driven Models: Methods and Applications

Abstract The flexibility, generality, and feasibility of score-driven models have contributed much to the impact of score-driven models in both research and policy. Score-driven models provide a unified framework for modeling the time-varying features in parametric models for time series. The predictive likelihood function is used as the driving mechanism for updating the time-varying parameters. It leads to a flexible, general, and intuitive way of modeling the dynamic features in the time series while the estimation and inference remain relatively simple. These properties remain valid when models rely on non-Gaussian densities and nonlinear dynamic structures. The class of score-driven models has become even more appealing since the developments in theory and methodology have progressed rapidly. Furthermore, new formulations of empirical dynamic models in this class have shown their relevance in economics and finance. In the context of macroeconomic studies, the key examples are nonlinear autoregressive, dynamic factor, dynamic spatial, and Markov-switching models. In the context of finance studies, the major examples are models for integer-valued time series, multivariate scale, and dynamic copula models. In finance applications, score-driven models are especially important because they provide particular updating mechanisms for time-varying parameters that limit the effect of the influential observations and outliers that are often present in financial time series.