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Comparison of Model Reduction Methods for VAR Processes

  • Ralf Brüggemann

    ()

    (Humboldt-Universität zu Berlin, Germany)

  • Hans-Martin Krolzig

    ()

    (Department of Economics, and Nuffield College, Oxford University)

  • Helmut Lütkepohl

    ()

    (Humboldt-Universität zu Berlin and European University Institute, Italy)

The objective of this study is to compare alternative computerized model-selection strategies in the context of the vector autoregressive (VAR) modeling framework. The focus is on a comparison of subset modeling strategies with the general-to-specific reduction approach automated by PcGets. Different measures of the possible gains of model selection are considered: (i) the chances of finding the `correct' model, that is, a model which contains all necessary right-hand side variables and is as parsimonious as possible, (ii) the accuracy of the implied impulse-responses and (iii) the forecast performance of the models obtained with different specification algorithms. In the Monte Carlo experiments, the procedures recover the DGP specification from a large VAR with anticipated size and power close to commencing from the DGP itself when evaluated at the empirical size. We find that subset strategies and PcGets are close competitors in many respects, with the forecast comparison indicating a clear advantage of the PcGets algorithm.

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File URL: http://www.nuff.ox.ac.uk/economics/papers/2003/W13/bkl02.pdf
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Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2003-W13.

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Length: 20 pages
Date of creation: 02 Apr 2003
Date of revision:
Handle: RePEc:nuf:econwp:0313
Contact details of provider: Web page: http://www.nuff.ox.ac.uk/economics/

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  1. Brüggemann, Ralf & Lütkepohl, Helmut, 2000. "Lag selection in subset VAR models with an application to a US monetary system," SFB 373 Discussion Papers 2000,37, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  2. Hans-Martin Krolzig, 2001. "General--to--Specific Reductions of Vector Autoregressive Processes," Computing in Economics and Finance 2001 164, Society for Computational Economics.
  3. David Hendry & Hans-Martin Krolzig, 2000. "Computer Automation of General-to-Specific Model Selection Procedures," Economics Series Working Papers 3, University of Oxford, Department of Economics.
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