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Can the LR test be helpful in choosing the optimal lag order in the VAR model when information criteria suggest different lag orders?

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  • A. Hatemi-J
  • R. S. Hacker

Abstract

The objective of this simulation study is to investigate whether the likelihood ratio (LR) test can pick the optimal lag order in the vector autoregressive model when the most applied information criteria (i.e. vector Schwarz-Bayesian, SBC and vector Hannan-Quinn, HQC) suggest two different lag orders. This lag-choosing procedure has been suggested by Hatemi-J (1999). The results based on the Monte Carlo simulations show that combining the LR test with SBC and HQC causes a substantial increase in the success rate of choosing the optimal lag order compared to cases when only SBC or HQC are used. This appears to be the case irrespective of homoscedasticity or conditional heteroscedasticity properties of the error-term in small sample sizes. This improvement in choosing the right lag order also tends to improve the forecasting capability of the underlying model.

Suggested Citation

  • A. Hatemi-J & R. S. Hacker, 2009. "Can the LR test be helpful in choosing the optimal lag order in the VAR model when information criteria suggest different lag orders?," Applied Economics, Taylor & Francis Journals, vol. 41(9), pages 1121-1125.
  • Handle: RePEc:taf:applec:v:41:y:2009:i:9:p:1121-1125
    DOI: 10.1080/00036840601019273
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    Cited by:

    1. Yıldırım, Durmuş Çağrı & Çevik, Emrah İsmail, 2017. "Finansal Dışa Açıklık İle Ekonomik Büyüme İlişkisi: Asimetrik Nedensellik Testi
      [The Relation between Financial Openness and Economic Growth: Asymmetric Causality Test]
      ," MPRA Paper 80472, University Library of Munich, Germany.
    2. repec:dug:actaec:y:2017:i:5:p:169-188 is not listed on IDEAS
    3. Kuo-Hao Lee & Ahmed Elkassabgi & Wei-Jen Hsieh, 2014. "Volatility of the Utilities Industry: Its Causal Relationship to Other Nine Industries," Review of Economics & Finance, Better Advances Press, Canada, vol. 4, pages 15-22, May.

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