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Optimal lag-length choice in stable and unstable VAR models under situations of homoscedasticity and ARCH

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Author Info

  • R. Scott Hacker
  • Abdulnasser Hatemi-J

Abstract

The performance of different information criteria - namely Akaike, corrected Akaike (AICC), Schwarz-Bayesian (SBC), and Hannan-Quinn - is investigated so as to choose the optimal lag length in stable and unstable vector autoregressive (VAR) models both when autoregressive conditional heteroscedasticity (ARCH) is present and when it is not. The investigation covers both large and small sample sizes. The Monte Carlo simulation results show that SBC has relatively better performance in lag-choice accuracy in many situations. It is also generally the least sensitive to ARCH regardless of stability or instability of the VAR model, especially in large sample sizes. These appealing properties of SBC make it the optimal criterion for choosing lag length in many situations, especially in the case of financial data, which are usually characterized by occasional periods of high volatility. SBC also has the best forecasting abilities in the majority of situations in which we vary sample size, stability, variance structure (ARCH or not), and forecast horizon (one period or five). frequently, AICC also has good lag-choosing and forecasting properties. However, when ARCH is present, the five-period forecast performance of all criteria in all situations worsens.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/02664760801920473
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Bibliographic Info

Article provided by Taylor and Francis Journals in its journal Journal of Applied Statistics.

Volume (Year): 35 (2008)
Issue (Month): 6 ()
Pages: 601-615

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Handle: RePEc:taf:japsta:v:35:y:2008:i:6:p:601-615

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Related research

Keywords: VAR; lag length; information criteria; Monte Carlo simulations; ARCH; stability;

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Cited by:
  1. Theofanis Papageorgiou & Panayotis G. Michaelides & John G. Milios, 2011. "Technology and economic fluctuations in the US food sector (1958-2006): An empirical approach from a political economy perspective," International Journal of Social Economics, Emerald Group Publishing, vol. 38(2), pages 140-164, January.
  2. Michaelides, Panayotis G. & Papageorgiou, Theofanis, 2012. "On the transmission of economic fluctuations from the USA to EU-15 (1960–2011)," Journal of Economics and Business, Elsevier, vol. 64(6), pages 427-438.

Lists

This item is featured on the following reading lists or Wikipedia pages:
  1. Векторна авторегресія in Wikipedia (Ukranian)
  2. Vektör otoregresyon in Wikipedia (Turkish)
  3. Vector autoregression in Wikipedia (English)
  4. مدل بردارهای خودبرگشتی in Wikipedia (Persian)

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