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Infinite-dimensional VARs and factor models

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  • Chudik, Alexander
  • Pesaran, M. Hashem

Abstract

This paper proposes a novel approach for dealing with the 'curse of dimensionality' in the case of infinite-dimensional vector autoregressive (IVAR) models. It is assumed that each unit or variable in the IVAR is related to a small number of neighbors and a large number of non-neighbors. The neighborhood effects are fixed and do not change with the number of units (N), but the coefficients of non-neighboring units are restricted to vanish in the limit as N tends to infinity. Problems of estimation and inference in a stationary IVAR model with an unknown number of unobserved common factors are investigated. A cross-section augmented least-squares (CALS) estimator is proposed and its asymptotic distribution is derived. Satisfactory small-sample properties are documented by Monte Carlo experiments. An empirical illustration shows the statistical significance of dynamic spillover effects in modeling of US real house prices across the neighboring states.

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Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 163 (2011)
Issue (Month): 1 (July)
Pages: 4-22

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Handle: RePEc:eee:econom:v:163:y:2011:i:1:p:4-22
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconom

Keywords: Large N and T panels Weak and strong cross-section dependence VARs Spatial models Factor models;

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Find related papers by JEL classification:
  • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
  • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
  • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
  • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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