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Lag Length Estimation in Large Dimensional Systems

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  • Jesus Gonzalo

    (Universidad Carlos III de Madrid)

  • Jean-Yves Pitarakis

    (The University of Reading)

Abstract

We study the impact of the system dimension on commonly used model selection criteria (AIC, BIC, HQ) and LR based general to specific testing strategies for lag length estimation in VARs. We show that AIC's well known overparameterization feature becomes quickly irrelevant as we move away from univariate models, with the criterion leading to consistent estimates under sufficiently large system dimensions. Unless the sample size is unrealistically small, all model selection criteria will tend to point towards low orders as the system dimension increases, with the AIC remaining by far the best performing criterion. This latter point is also illustrated via the use of an analytical power function for model selection criteria. The comparison between the model selection and general to specific testing strategy is discussed within the context of a new penalty term leading to the same choice of lag length under both approaches.
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Suggested Citation

  • Jesus Gonzalo & Jean-Yves Pitarakis, 2001. "Lag Length Estimation in Large Dimensional Systems," Econometrics 0108002, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpem:0108002
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    3. Haldrup, Niels & Hylleberg, Svend & Pons, Gabriel & Sanso, Andreu, 2007. "Common Periodic Correlation Features and the Interaction of Stocks and Flows in Daily Airport Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 21-32, January.
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    16. Stephan B. Bruns & David I. Stern, 2015. "Meta-Granger causality testing," CAMA Working Papers 2015-22, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
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    Keywords

    subliminal extant Smith economagic gmm;

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    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General

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