Model selection, Estimation and Forecasting in VAR Models with Short-run and Long-run Restrictions

George Athanasopoulos (george.athanasopoulos@monash.edu), Osmani Guillén, João Issler and Farshid Vahid

No 205, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: We study the joint determination of the lag length, the dimension of the cointegrating space and the rank of the matrix of short-run parameters of a vector autoregressive (VAR) model using model selection criteria. We consider model selection criteria which have data-dependent penalties as well as the traditional ones. We suggest a new two-step model selection procedure which is a hybrid of traditional criteria and criteria with data-dependant penalties and we prove its consistency. Our Monte Carlo simulations measure the improvements in forecasting accuracy that can arise from the joint determination of lag-length and rank using our proposed procedure, relative to an unrestricted VAR or a cointegrated VAR estimated by the commonly used procedure of selecting the lag-length only and then testing for cointegration. Two empirical applications forecasting Brazilian inflation and U.S. macroeconomic aggregates growth rates respectively show the usefulness of the model-selection strategy proposed here. The gains in different measures of forecasting accuracy are substantial, especially for short horizons.

Date: 2010-04
New Economics Papers: this item is included in nep-cba, nep-ecm, nep-for and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Model selection, estimation and forecasting in VAR models with short-run and long-run restrictions (2011)
Working Paper: Model selection, estimation and forecasting in VAR models with short-run and long-run restrictions (2011)
Working Paper: Model selection, estimation and forecasting in VAR models with short-run and long-run restrictions (2010)
Working Paper: Model selection, estimation and forecasting in VAR models with short-run and long-run restrictions (2010)
Working Paper: Model selection, estimation and forecasting in VAR models with short-run and long-run restrictions (2009)
Working Paper: Model selection, estimation and forecasting in VAR models with short-run and long-run restrictions (2009)
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