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Selection of Optimal Lag Length in Cointegrated VAR Models with Weak Form of Common Cyclical Features

Author

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  • Carlos Enrique Carrasco Gutiérrez
  • Reinaldo Castro Souza
  • Osmani Teixeira de Carvalho Guillén

Abstract

An important aspect of empirical research based on the vector autoregressive (VAR) model is the choice of the lag order, since all inference in the VAR model depends on the correct model specification. Literature has shown important studies of how to select the lag order of a nonstationary VAR model subject to cointegration restrictions. In this work, we consider an additional weak form (WF) restriction of common cyclical features in the model in order to analyze the appropriate way to select the correct lag order. Two methodologies have been used: the traditional information criteria (AIC, HQ and SC) and an alternative criterion (IC(p,s)) which select simultaneously the lag order p and the rank structure s due to the WF restriction. A Monte-Carlo simulation is used in the analysis. The results indicate that the cost of ignoring additional WF restrictions in vector autoregressive modeling can be high, especially when SC criterion is used.

Suggested Citation

  • Carlos Enrique Carrasco Gutiérrez & Reinaldo Castro Souza & Osmani Teixeira de Carvalho Guillén, 2007. "Selection of Optimal Lag Length in Cointegrated VAR Models with Weak Form of Common Cyclical Features," Working Papers Series 139, Central Bank of Brazil, Research Department.
  • Handle: RePEc:bcb:wpaper:139
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    References listed on IDEAS

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    1. Vahid, F & Engle, Robert F, 1993. "Common Trends and Common Cycles," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(4), pages 341-360, Oct.-Dec..
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    6. Osmani Teixeira de Carvalho Guillén & João Victor Issler & George Athanasopoulos, 2005. "Forecasting Accuracy and Estimation Uncertainty Using VAR Models with Short- and Long-Term Economic Restrictions: A Monte-Carlo Study," Monash Econometrics and Business Statistics Working Papers 15/05, Monash University, Department of Econometrics and Business Statistics.
    7. Carrasco-Gutierrez, Carlos Enrique & Reis Gomes, Fábio Augusto, 2007. "Evidence on Common Feature and Business Cycle Synchronization in Mercosur," MPRA Paper 66064, University Library of Munich, Germany, revised 2009.
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    9. Alain Hecq & Franz Palm & Jean-Pierre Urbain, 2001. "Testing for Common Cyclical Features in Var Models with Cointegration," CESifo Working Paper Series 451, CESifo Group Munich.
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    Cited by:

    1. Ghouse, Ghulam & Khan, Saud Ahmed & Rehman, Atiq Ur, 2018. "ARDL model as a remedy for spurious regression: problems, performance and prospectus," MPRA Paper 83973, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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