VARX-L: Structured regularization for large vector autoregressions with exogenous variables

The vector autoregression (VAR) has long proven to be an effective method for modeling the joint dynamics of macroeconomic time series, as well as for forecasting. One major shortcoming of the VAR that has limited its applicability is its heavy parameterization: the parameter space grows quadratically with the number of series included, quickly exhausting the available degrees of freedom. Consequently, using VARs for forecasting is intractable for low-frequency, high-dimensional macroeconomic data. However, empirical evidence suggests that VARs that incorporate more component series tend to result in more accurate forecasts. Most conventional methods that allow for the estimation of large VARs either require ad hoc subjective specifications or are computationally infeasible. Moreover, as global economies become more intricately intertwined, there has been a substantial interest in incorporating the impact of stochastic, unmodeled exogenous variables. Vector autoregression with exogenous variables (VARX) extends the VAR to allow for the inclusion of unmodeled variables, but faces similar dimensionality challenges.