No. 635: Forecasting with Dynamic Models using Shrinkage-based Estimation
Andrea Carriero Queen Mary, University of London George Kapetanios Queen Mary, University of London Massimiliano Marcellino Bocconi University and EUI
October 1, 2008
Abstract
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.
J.E.L classification codes: C13, C22, C53
Keywords: Shrinkage, Forecasting