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Model selection, estimation and forecasting in VAR models with short-run and long-run restrictions

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  • Athanasopoulos, George
  • Guillén, Osmani Teixeira de Carvalho
  • Issler, João Victor
  • Vahid, Farshid

Abstract

We study the joint determination of the lag length, the dimension of the cointegrating spaceand the rank of the matrix of short-run parameters of a vector autoregressive (VAR) model usingmodel selection criteria. We consider model selection criteria which have data-dependent penaltiesas well as the traditional ones. We suggest a new two-step model selection procedure which is ahybrid of traditional criteria and criteria with data-dependant penalties and we prove its consistency.Our Monte Carlo simulations measure the improvements in forecasting accuracy that can arisefrom the joint determination of lag-length and rank using our proposed procedure, relative to anunrestricted VAR or a cointegrated VAR estimated by the commonly used procedure of selecting thelag-length only and then testing for cointegration. Two empirical applications forecasting Brazilianin ation and U.S. macroeconomic aggregates growth rates respectively show the usefulness of themodel-selection strategy proposed here. The gains in di¤erent measures of forecasting accuracy aresubstantial, especially for short horizons.

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Paper provided by Graduate School of Economics, Getulio Vargas Foundation (Brazil) in its series Economics Working Papers (Ensaios Economicos da EPGE) with number 704.

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Date of creation: 29 Mar 2010
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Handle: RePEc:fgv:epgewp:704

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Cited by:
  1. Zhipeng Liao & Peter C.B. Phillips, 2012. "Automated Estimation of Vector Error Correction Models," Cowles Foundation Discussion Papers 1873, Cowles Foundation for Research in Economics, Yale University.
  2. Hecq, Alain & Issler, João Victor, 2012. "A Common-Feature Approach for Testing Present-Value Restrictions with Financial Data," Economics Working Papers (Ensaios Economicos da EPGE) 728, Graduate School of Economics, Getulio Vargas Foundation (Brazil).
  3. Heather M Anderson & Farshid Vahid, 2010. "VARs, Cointegration and Common Cycle Restrictions," Monash Econometrics and Business Statistics Working Papers 14/10, Monash University, Department of Econometrics and Business Statistics.
  4. Issler, João Victor & Rodrigues, Claudia & Burjack, Rafael, 2013. "Using Common Features to Understand the Behavior of Metal-Commodity Prices and Forecast them at Different Horizons," Economics Working Papers (Ensaios Economicos da EPGE) 736, Graduate School of Economics, Getulio Vargas Foundation (Brazil).

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