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Shrinkage estimation of semiparametric multiplicative error models

  • Brownlees, Christian T.
  • Gallo, Giampiero M.

Within models for nonnegative time series, it is common to encounter deterministic components (trends, seasonalities) which can be specified in a flexible form. This work proposes the use of shrinkage type estimation for the parameters of such components. The amount of smoothing to be imposed on the estimates can be chosen using different methodologies: Cross-Validation for dependent data or the recently proposed Focused Information Criterion. We illustrate such a methodology using a semiparametric autoregressive conditional duration model that decomposes the conditional expectations of durations into their dynamic (parametric) and diurnal (flexible) components. We use a shrinkage estimator that jointly estimates the parameters of the two components and controls the smoothness of the estimated flexible component. The results show that, from the forecasting perspective, an appropriate shrinkage strategy can significantly improve on the baseline maximum likelihood estimation.

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Article provided by Elsevier in its journal International Journal of Forecasting.

Volume (Year): 27 (2011)
Issue (Month): 2 ()
Pages: 365-378

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Handle: RePEc:eee:intfor:v:27:y:2011:i:2:p:365-378
Contact details of provider: Web page: http://www.elsevier.com/locate/ijforecast

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  10. Christian T. Brownlees & Giampiero M. Gallo, 2008. "On Variable Selection for Volatility Forecasting: The Role of Focused Selection Criteria," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 6(4), pages 513-539, Fall.
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