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Forecasting with a parsimonious subset VAR model

Author

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  • Cheong, Chongcheul
  • Lee, Hyunchul

Abstract

This paper suggests using a unit t-value criterion in imposing restrictions on lags to formulate a subset vector autoregressive (VAR) model for the purpose of point forecasts. Among any other alternative models nested to the initial VAR model, this less restrictive modeling strategy produces the smallest log determinant of the residual covariance matrix adjusted by degrees of freedom. Each equation of the finally derived subset VAR model has a maximized R̄2 adjusted by degrees of freedom in samples and consequently a minimized 1-step-ahead prediction error in out-of-samples. The applicability of this modeling strategy is excised to the case of a bivariate VAR model for output growth and inflation.

Suggested Citation

  • Cheong, Chongcheul & Lee, Hyunchul, 2014. "Forecasting with a parsimonious subset VAR model," Economics Letters, Elsevier, vol. 125(2), pages 167-170.
  • Handle: RePEc:eee:ecolet:v:125:y:2014:i:2:p:167-170
    DOI: 10.1016/j.econlet.2014.08.027
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    References listed on IDEAS

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    1. Ralf BRUEGGEMANN & Hans-Martin KROLZIG & Helmut LUETKEPOHL, 2002. "Comparison of Model Reduction Methods for VAR Processes," Economics Working Papers ECO2002/19, European University Institute.
    2. De Gooijer, Jan G. & Hyndman, Rob J., 2006. "25 years of time series forecasting," International Journal of Forecasting, Elsevier, vol. 22(3), pages 443-473.
    3. Hendry, David F., 1995. "Dynamic Econometrics," OUP Catalogue, Oxford University Press, number 9780198283164.
    4. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    5. Hans-Martin Krolzig, 2003. "General-to-Specific Model Selection Procedures for Structural Vector Autoregressions," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(s1), pages 769-801, December.
    6. Hans-Martin Krolzig, 2003. "General-to-Specific Model Selection Procedures for Structural Vector Autoregressions," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(s1), pages 769-801, December.
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    More about this item

    Keywords

    Prediction error; Unit t-value criterion; Model selection;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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