Forecasting with dynamic models using shrinkage-based estimation
Title: Forecasting with dynamic models using shrinkage-based estimation
Series/Number: Queen Mary University of London; Working Papers; 2008/635
The paper provides a proof of consistency of the ridge estimator for regressions where the number of regressors tends to infinity. Such result is obtained without assuming a factor structure. A Monte Carlo study suggests that shrinkage autoregressive models can lead to very substantial advantages compared to standard autoregressive models. An empirical application focusing on forecasting inflation and GDP growth in a panel of countries confirms this finding.
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