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
References: View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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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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