School of Economics and Finance

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

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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