Model selection criteria and quadratic discrimination in ARMA and SETAR time series models
We show that analyzing model selection in ARMA time series models as a quadratic discrimination problem provides a unifying approach for deriving model selection criteria. Also this approach suggest a different definition of expected likelihood that the one proposed by Akaike. This approach leads to including a correction term in the criteria which does not modify their large sample performance but can produce significant improvement in the performance of the criteria in small samples. Thus we propose a family of criteria which generalizes the commonly used model selection criteria. These ideas can be extended to self exciting autoregressive models (SETAR) and we generalize the proposed approach for these non linear time series models. A Monte-Carlo study shows that this family improves the finite sample performance of criteria such as AIC, corrected AIC and BIC, for ARMA models, and AIC, corrected AIC, BIC and some cross-validation criteria for SETAR models. In particular, for small and medium sample size the frequency of selecting the true model improves for the consistent criteria and the root mean square error of prediction improves for the efficient criteria. These results are obtained for both linear ARMA models and SETAR models in which we assume that the threshold and the parameters are unknown.
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- McQuarrie, Allan & Shumway, Robert & Tsai, Chih-Ling, 1997. "The model selection criterion AICu," Statistics & Probability Letters, Elsevier, vol. 34(3), pages 285-292, June.
- Chow, Gregory C., 1981. "A comparison of the information and posterior probability criteria for model selection," Journal of Econometrics, Elsevier, vol. 16(1), pages 21-33, May.
- van der Leeuw, Jan, 1994. "The covariance matrix of ARMA errors in closed form," Journal of Econometrics, Elsevier, vol. 63(2), pages 397-405, August.
- Kapetanios, G., 1999. "Model Selection in Threshold Models," Cambridge Working Papers in Economics 9906, Faculty of Economics, University of Cambridge.
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