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

A. Hatemi-J, R. S. Hacker

    Research output: Contribution to journalArticlepeer-review

    20 Citations (Scopus)

    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.

    Original languageEnglish
    Pages (from-to)1121-1125
    Number of pages5
    JournalApplied Economics
    Volume41
    Issue number9
    DOIs
    Publication statusPublished - 2009

    ASJC Scopus subject areas

    • Economics and Econometrics

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