Forecasting with a parsimonious subset VAR model

Chongcheul Cheong and Hyunchul Lee

Economics Letters, 2014, vol. 125, issue 2, 167-170

Abstract: This paper suggests using a unit t-value criterion in imposing restrictions on lags to formulate a subset vector autoregressive (VAR) model for the purpose of point forecasts. Among any other alternative models nested to the initial VAR model, this less restrictive modeling strategy produces the smallest log determinant of the residual covariance matrix adjusted by degrees of freedom. Each equation of the finally derived subset VAR model has a maximized R̄2 adjusted by degrees of freedom in samples and consequently a minimized 1-step-ahead prediction error in out-of-samples. The applicability of this modeling strategy is excised to the case of a bivariate VAR model for output growth and inflation.

Keywords: Prediction error; Unit t-value criterion; Model selection (search for similar items in EconPapers)
JEL-codes: C32 C53 E37 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:125:y:2014:i:2:p:167-170

DOI: 10.1016/j.econlet.2014.08.027

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