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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 space andthe rank of the matrix of short-run parameters of a vector autoregressive (VAR) model using modelselection criteria. We consider model selection criteria which have data-dependent penalties aswell 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 Brazilianinflation and U.S. macroeconomic aggregates growth rates respectively show the usefulness of themodel-selection strategy proposed here. The gains in different measures of forecasting accuracy aresubstantial, especially for short horizons.

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Paper provided by FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil) in its series Economics Working Papers (Ensaios Economicos da EPGE) with number 707.

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Date of creation: 13 Sep 2010
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Handle: RePEc:fgv:epgewp:707

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Citations

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Cited by:
  1. Peter C.B. Phillips & Degui Li & Jiti Gao, 2013. "Estimating Smooth Structural Change in Cointegration Models," Cowles Foundation Discussion Papers 1910, Cowles Foundation for Research in Economics, Yale University.
  2. Hecq Alain & Laurent Sébastien & Palm Franz, 2011. "Common intraday periodicity," Research Memorandum 010, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  3. 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.
  4. 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.
  5. Osmani Teixeira de Carvalho Guillén & Alain Hecq & João Victor Issler & Diogo Saraiva, 2013. "Time Series under Present-Value-Model Short- and Long-run Co-movement Restrictions," Working Papers Series 330, Central Bank of Brazil, Research Department.
  6. Guillén, Osmani Teixeira de Carvalho & Hecq, Alain & Issler, João Victor & Saraiva, Diogo, 2013. "Forecasting multivariate time series under present-value-model short- and long-run co-movement restrictions," Economics Working Papers (Ensaios Economicos da EPGE) 742, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  7. Issler, João Victor & Rodrigues, Claudia & Burjack, Rafael, 2014. "Using common features to understand the behavior of metal-commodity prices and forecast them at different horizons," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 310-335.
  8. Hecq Alain & Victor Issler João, 2012. "A Common-Feature Approach for Testing Present-Value Restrictions with Financial Data," Research Memorandum 006, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  9. Ferreira, Pedro Cavalcanti & Pessôa, Samuel & Santos, Marcelo dos, 2014. "Globalization and the Industrial Revolution," Economics Working Papers (Ensaios Economicos da EPGE) 753, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).

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