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Bayesian doubly adaptive elastic-net Lasso for VAR shrinkage

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  • Gefang, Deborah

Abstract

We develop a novel Bayesian doubly adaptive elastic-net Lasso (DAELasso) approach for VAR shrinkage. DAELasso achieves variable selection and coefficient shrinkage in a data-based manner. It deals constructively with explanatory variables which tend to be highly collinear by encouraging the grouping effect. In addition, it also allows for different degrees of shrinkage for different coefficients. Rewriting the multivariate Laplace distribution as a scale mixture, we establish closed-form conditional posteriors that can be drawn from a Gibbs sampler. An empirical analysis shows that the forecast results produced by DAELasso and its variants are comparable to those from other popular Bayesian methods, which provides further evidence that the forecast performances of large and medium sized Bayesian VARs are relatively robust to prior choices, and, in practice, simple Minnesota types of priors can be more attractive than their complex and well-designed alternatives.

Suggested Citation

  • Gefang, Deborah, 2014. "Bayesian doubly adaptive elastic-net Lasso for VAR shrinkage," International Journal of Forecasting, Elsevier, vol. 30(1), pages 1-11.
  • Handle: RePEc:eee:intfor:v:30:y:2014:i:1:p:1-11
    DOI: 10.1016/j.ijforecast.2013.04.004
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    Cited by:

    1. Koop, Gary & Korobilis, Dimitris, 2016. "Model uncertainty in Panel Vector Autoregressive models," European Economic Review, Elsevier, vol. 81(C), pages 115-131.
    2. Louzis Dimitrios P., 2016. "Steady-state priors and Bayesian variable selection in VAR forecasting," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 20(5), pages 495-527, December.
    3. Ziel, Florian, 2016. "Iteratively reweighted adaptive lasso for conditional heteroscedastic time series with applications to AR–ARCH type processes," Computational Statistics & Data Analysis, Elsevier, vol. 100(C), pages 773-793.
    4. Chan, Joshua C.C. & Eisenstat, Eric & Koop, Gary, 2016. "Large Bayesian VARMAs," Journal of Econometrics, Elsevier, vol. 192(2), pages 374-390.
    5. Gary Koop, 2012. "Using VARs and TVP-VARs with Many Macroeconomic Variables," Central European Journal of Economic Modelling and Econometrics, CEJEME, vol. 4(3), pages 143-167, September.
    6. Jorge A Chan-Lau, 2017. "Lasso Regressions and Forecasting Models in Applied Stress Testing," IMF Working Papers 17/108, International Monetary Fund.
    7. Gary Koop & Dimitris Korobilis & Davide Pettenuzzo, 2016. "Bayesian Compressed Vector Autoregressions," Working Papers 2016_09, Business School - Economics, University of Glasgow.
    8. Monica Billio & Roberto Casarin & Luca Rossini, 2016. "Bayesian Nonparametric Sparse Seemingly Unrelated Regression Model (SUR)," Papers 1608.02740, arXiv.org, revised Jul 2017.
    9. Daniel Felix Ahelegbey & Monica Billio & Roberto Casarin, 2016. "Sparse Graphical Vector Autoregression: A Bayesian Approach," Annals of Economics and Statistics, GENES, issue 123-124, pages 333-361.
    10. Huber, Florian & Punzi, Maria Teresa, 2017. "The shortage of safe assets in the US investment portfolio: Some international evidence," Journal of International Money and Finance, Elsevier, vol. 74(C), pages 318-336.
    11. Sandra Stankiewicz, 2015. "Forecasting Euro Area Macroeconomic Variables with Bayesian Adaptive Elastic Net," Working Paper Series of the Department of Economics, University of Konstanz 2015-12, Department of Economics, University of Konstanz.
    12. Korobilis, Dimitris, 2016. "Prior selection for panel vector autoregressions," Computational Statistics & Data Analysis, Elsevier, vol. 101(C), pages 110-120.
    13. Deborah Gefang & Geraint Johnes, 2014. "Asymmetric volatility spillovers between UK regional worker flows and vacancies," Discussion Papers in Economics 14/08, Department of Economics, University of Leicester.
    14. Michele Campolieti & Deborah Gefang & Gary Koop, 2013. "Technical appendix to: a new look at variation in employment growth in Canada," Working Papers 26145533, Lancaster University Management School, Economics Department.
    15. Kascha, Christian & Trenkler, Carsten, 2015. "Forecasting VARs, model selection, and shrinkage," Working Papers 15-07, University of Mannheim, Department of Economics.
    16. Mihaela Simionescu, 2016. "Foreign Direct Investment and Sustainable Development. A Regional Approach for Romania," Working Papers of Macroeconomic Modelling Seminar 162702, Institute for Economic Forecasting.

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    Keywords

    Bayesian; DAELasso; VAR;

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