Model selection, estimation and forecasting in VAR models with short-run and long-run restrictions

George Athanasopoulos (), Osmani Guillén, João Issler and Farshid Vahid

No 707, FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) from EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil)

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: 2010-09-13
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-for
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Citations: View citations in EconPapers (2)

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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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