Econometric Model Determination

Peter Phillips

Econometrica, 1996, vol. 64, issue 4, 763-812

Abstract: This paper is concerned with model determination methods and their use in the prediction of economic time series. The methods are Bayesian but they can be justified by classical arguments as well. The paper continues some recent work on Bayesian asymptotic, develops embedding techniques for vector martingales, and implements the modeling ideas in a multivariate regression framework that includes Bayesian vector autoregression (BVAR's) and reduced rank regressions (RRR's). It is shown how the theory in the paper can be used; (i) to construct optimized BVAR's; (ii) to compare models such as BVAR's, optimized BVAR's and RRR's; (iii) to perform joint order selection of cointegrating rank, lag length and trend degree in a VAR; and (iv) to discard data that may be irrelevant and reset the initial conditions of a model. Copyright 1996 by The Econometric Society.

Date: 1996
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