Comparison of Model Reduction Methods for VAR Processes
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.
References listed on IDEAS
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- Krolzig, Hans-Martin & Hendry, David F., 2001.
"Computer automation of general-to-specific model selection procedures,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 25(6-7), pages 831-866, June.
- Hans-Martin Krolzig & David Hendry, 1999. "Computer Automation of General-to-Specific Model Selection Procedures," Computing in Economics and Finance 1999 314, Society for Computational Economics.
- 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.
- Hans-Martin Krolzig, 2000. "Computer Automation of General-to-Specific Model Selection Procedures," Econometric Society World Congress 2000 Contributed Papers 0411, Econometric Society.
- 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.
- Ralf Brueggemann & Helmut Leutkepohl, 2000. "Lag Selection in Subset VAR Models with an Application to a U.S. Monetary System," Econometric Society World Congress 2000 Contributed Papers 0821, Econometric Society.
- Hans-Martin Krolzig, 2001. "General--to--Specific Reductions of Vector Autoregressive Processes," Computing in Economics and Finance 2001 164, Society for Computational Economics. Full references (including those not matched with items on IDEAS)