Penalized Estimation of Panel Vector Autoregressive Models

Annika Schnücker

No EI-2019-33, Econometric Institute Research Papers from Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute

Abstract: This paper proposes LASSO estimation specific for panel vector autoregressive (PVAR) models. The penalty term allows for shrinkage for different lags, for shrinkage towards homogeneous coeficients across panel units, for penalization of lags of variables belonging to another cross-sectional unit, and for varying penalization across equations. The penalty parameters therefore build on time series and cross-sectional properties that are commonly found in PVAR models. Simulation results point towards advantages of using the proposed LASSO for PVAR models over ordinary least squares in terms of forecast accuracy. An empirical forecasting application with five countries support these findings.

Keywords: Model selection; multi-country model; shrinkage estimation (search for similar items in EconPapers)
JEL-codes: C13 C32 C33 (search for similar items in EconPapers)
Pages: 39
Date: 2019-11-01
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:ems:eureir:122072

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