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.

Model selection, multi-country model, shrinkage estimation
Estimation (jel C13), Time-Series Models; Dynamic Quantile Regressions (jel C32), Models with Panel Data (jel C33)
Econometric Institute Research Papers
Department of Econometrics

Schnücker, A.M. (2019, November). Penalized Estimation of Panel Vector Autoregressive Models. Econometric Institute Research Papers. Retrieved from