Advanced

Can the LR test be helpful in choosing the optimal lag order in the VAR model when information criteria suggest different lag orders?

Hatemi-J, Abdulnasser LU and Hacker, R. S. (2009) In Applied Economics 41(9). p.1121-1125
Abstract
The objective of this simulation study is to investigate whether the likelihood ratio (LR) test can pick the optimal lag order in the vector autoregressive model when the most applied information criteria (i.e. vector Schwarz-Bayesian, SBC and vector Hannan-Quinn, HQC) suggest two different lag orders. This lag-choosing procedure has been suggested by Hatemi-J (1999). The results based on the Monte Carlo simulations show that combining the LR test with SBC and HQC causes a substantial increase in the success rate of choosing the optimal lag order compared to cases when only SBC or HQC are used. This appears to be the case irrespective of homoscedasticity or conditional heteroscedasticity properties of the error-term in small sample sizes.... (More)
The objective of this simulation study is to investigate whether the likelihood ratio (LR) test can pick the optimal lag order in the vector autoregressive model when the most applied information criteria (i.e. vector Schwarz-Bayesian, SBC and vector Hannan-Quinn, HQC) suggest two different lag orders. This lag-choosing procedure has been suggested by Hatemi-J (1999). The results based on the Monte Carlo simulations show that combining the LR test with SBC and HQC causes a substantial increase in the success rate of choosing the optimal lag order compared to cases when only SBC or HQC are used. This appears to be the case irrespective of homoscedasticity or conditional heteroscedasticity properties of the error-term in small sample sizes. This improvement in choosing the right lag order also tends to improve the forecasting capability of the underlying model. (Less)
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Contribution to journal
publication status
published
subject
in
Applied Economics
volume
41
issue
9
pages
1121 - 1125
publisher
Routledge
external identifiers
  • wos:000264750000005
  • scopus:67650287973
ISSN
1466-4283
DOI
10.1080/00036840601019273
language
English
LU publication?
yes
id
dfc46d35-e506-47ed-bbd5-aeeeca1c7462 (old id 1400779)
date added to LUP
2009-06-12 10:43:18
date last changed
2017-03-05 03:31:52
@article{dfc46d35-e506-47ed-bbd5-aeeeca1c7462,
  abstract     = {The objective of this simulation study is to investigate whether the likelihood ratio (LR) test can pick the optimal lag order in the vector autoregressive model when the most applied information criteria (i.e. vector Schwarz-Bayesian, SBC and vector Hannan-Quinn, HQC) suggest two different lag orders. This lag-choosing procedure has been suggested by Hatemi-J (1999). The results based on the Monte Carlo simulations show that combining the LR test with SBC and HQC causes a substantial increase in the success rate of choosing the optimal lag order compared to cases when only SBC or HQC are used. This appears to be the case irrespective of homoscedasticity or conditional heteroscedasticity properties of the error-term in small sample sizes. This improvement in choosing the right lag order also tends to improve the forecasting capability of the underlying model.},
  author       = {Hatemi-J, Abdulnasser and Hacker, R. S.},
  issn         = {1466-4283},
  language     = {eng},
  number       = {9},
  pages        = {1121--1125},
  publisher    = {Routledge},
  series       = {Applied Economics},
  title        = {Can the LR test be helpful in choosing the optimal lag order in the VAR model when information criteria suggest different lag orders?},
  url          = {http://dx.doi.org/10.1080/00036840601019273},
  volume       = {41},
  year         = {2009},
}