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Variable selection in panel models with breaks

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  • Smith, Simon C.
  • Timmermann, Allan
  • Zhu, Yinchu

Abstract

We develop a Bayesian approach that performs variable selection in panel regression models affected by breaks. Our approach enables deactivation of pervasive regressors and activation of weak regressors for short periods (regimes). We establish theoretical results on the concentration properties of the posterior as well as the rate of convergence for estimating the break dates. Our methodology is demonstrated in simulations and in an empirical application to firms’ choice of capital structure. We find that ignoring breaks can lead to overestimating the number of relevant regressors, but also a failure to activate regressors that are informative only in short-lived regimes.

Suggested Citation

  • Smith, Simon C. & Timmermann, Allan & Zhu, Yinchu, 2019. "Variable selection in panel models with breaks," Journal of Econometrics, Elsevier, vol. 212(1), pages 323-344.
    • Handle: RePEc:eee:econom:v:212:y:2019:i:1:p:323-344
    DOI: 10.1016/j.jeconom.2019.04.033
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    2. Christis Katsouris, 2023. "High Dimensional Time Series Regression Models: Applications to Statistical Learning Methods," Papers 2308.16192, arXiv.org.
    3. Smith, Simon C., 2021. "International stock return predictability," International Review of Financial Analysis, Elsevier, vol. 78(C).
    4. Smith, Simon C., 2022. "Time-variation, multiple testing, and the factor zoo," International Review of Financial Analysis, Elsevier, vol. 84(C).

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    More about this item

    Keywords

    Variable selection; Structural breaks; Panel data; Bayesian analysis; High-dimensional modeling; Firms’ choice of capital structure;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General

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