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Determination of vector error correction models in high dimensions

Liang, Chong; Schienle, Melanie ORCID iD icon

Abstract:

We provide a shrinkage type methodology which allows for simultaneous model selection and estimation of vector error correction models (VECM) when the dimension is large and can increase with sample size. Model determination is treated as a joint selection problem of cointegrating rank and autoregressive lags under respective practically valid sparsity assumptions. We show consistency of the selection mechanism by the resulting Lasso-VECM estimator under very general assumptions on dimension, rank and error terms. Moreover, with computational complexity of a linear programming problem only, the procedure remains computationally tractable in high dimensions. We demonstrate the effectiveness of the proposed approach by a simulation study and an empirical application to recent CDS data after the financial crisis.


Volltext §
DOI: 10.5445/IR/1000092474
Cover der Publikation
Zugehörige Institution(en) am KIT Institut für Volkswirtschaftslehre (ECON)
Publikationstyp Forschungsbericht/Preprint
Publikationsjahr 2019
Sprache Englisch
Identifikator ISSN: 2190-9806
urn:nbn:de:swb:90-924744
KITopen-ID: 1000092474
Verlag Karlsruher Institut für Technologie (KIT)
Umfang 38 S.
Serie Working paper series in economics ; 124
Schlagwörter High-dimensional time series, VECM, Cointegration rank and lag selection, Lasso, Credit Default Swap
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