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Comparison of model reduction methods for VAR processes

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  • Brüggemann, Ralf
  • Krolzig, Hans-Martin
  • Lütkepohl, Helmut

Abstract

The objective of this study is to compare alternative computerized model-selection strategies in the context of the vector autoregressive (VAR) modeling framework. The focus is on a comparison of subset modeling strategies with the general-to-specific reduction approach automated by PcGets. Different measures of the possible gains of model selection are considered: (i) the chances of finding the correct model, that is, a model which contains all necessary right-hand side variables and is as parsimonious as possible, (ii) the accuracy of the implied impulse-responses and (iii) the forecast performance of the models obtained with different specification algorithms. In the Monte Carlo experiments, the procedures recover the DGP specification from a large VAR with anticipated size and power close to commencing from the DGP itself when evaluated at the empirical size. We find that subset strategies and PcGets are close competitors in many respects, with the forecast comparison indicating a clear advantage of the PcGets algorithm. --

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Bibliographic Info

Paper provided by Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes in its series SFB 373 Discussion Papers with number 2002,80.

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Date of creation: 2002
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Handle: RePEc:zbw:sfb373:200280

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Keywords: vector autoregression; model selection; subset model; lag order determination;

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  1. Brüggemann, Ralf & Lütkepohl, Helmut, 2000. "Lag selection in subset VAR models with an application to a US monetary system," SFB 373 Discussion Papers, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes 2000,37, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  2. Krolzig, Hans-Martin & Hendry, David F., 2001. "Computer automation of general-to-specific model selection procedures," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 25(6-7), pages 831-866, June.
  3. Hans-Martin Krolzig, 2001. "General--to--Specific Reductions of Vector Autoregressive Processes," Computing in Economics and Finance 2001, Society for Computational Economics 164, Society for Computational Economics.
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Cited by:
  1. Gianluca Cubadda & Alain Hecq & Franz C. Palm, 2008. "Studying Co-Movements in Large Multivariate Data Prior to Multivariate Modelling," CEIS Research Paper, Tor Vergata University, CEIS 125, Tor Vergata University, CEIS, revised 14 Jul 2008.
  2. Oscar Díaz Q. & Marco Laguna V., 2007. "Factores que explican la reducción de las tasas pasivas de interés en el sistema bancario boliviano," Monetaria, Centro de Estudios Monetarios Latinoamericanos, Centro de Estudios Monetarios Latinoamericanos, vol. 0(4), pages 331-366, octubre-d.
  3. Kapetanios, George, 2007. "Variable selection in regression models using nonstandard optimisation of information criteria," Computational Statistics & Data Analysis, Elsevier, Elsevier, vol. 52(1), pages 4-15, September.
  4. María Fernanda Hernández & Juan José Valero & María Bernardette Díaz, 2007. "Perfil de riesgos del sistema bancario venezolano: aplicación de la metodología de stress testing," Monetaria, Centro de Estudios Monetarios Latinoamericanos, Centro de Estudios Monetarios Latinoamericanos, vol. 0(4), pages 405-452, octubre-d.
  5. Jana Eklund & George Kapetanios, 2008. "A Review of Forecasting Techniques for Large Data Sets," Working Papers, Queen Mary, University of London, School of Economics and Finance 625, Queen Mary, University of London, School of Economics and Finance.
  6. Hans-Martin Krolzig, 2003. "General-to-Specific Model Selection Procedures for Structural Vector Autoregressions," Economics Papers 2003-W15, Economics Group, Nuffield College, University of Oxford.
  7. Alejandro Gaytán González & Jesús R. González García, 2006. "Structural Changes in the Transmission Mechanism of Monetary Policy in Mexico: A Non-linear VAR Approach," Working Papers, Banco de México 2006-06, Banco de México.
  8. David Hendry & Hans-Martin Krolzig, 2003. "Sub-Sample Model Selection Procedures in Gets Modelling," Economics Series Working Papers, University of Oxford, Department of Economics 2003-W17, University of Oxford, Department of Economics.
  9. Alejandro Gaytán & Jesús González-García, 2007. "Cambios estructurales en el mecanismo de transmisión de la política monetaria en México: un enfoque VAR no lineal," Monetaria, Centro de Estudios Monetarios Latinoamericanos, Centro de Estudios Monetarios Latinoamericanos, vol. 0(4), pages 367-404, octubre-d.
  10. Dietmar Maringer & Peter Winker, 2004. "Optimal Lag Structure Selection in VEC-Models," Computing in Economics and Finance 2004, Society for Computational Economics 155, Society for Computational Economics.
  11. Barrera, Carlos, 2013. "El sistema de predicción desagregada: Una evaluación de las proyecciones de inflación 2006-2011," Working Papers, Banco Central de Reserva del Perú 2013-009, Banco Central de Reserva del Perú.

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