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Infinite-dimensional VARs and factor models

Listed author(s):
  • Chudik, Alexander
  • Pesaran, M. Hashem

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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File URL: http://www.sciencedirect.com/science/article/pii/S030440761000206X
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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

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