A0189
Title: Dimension reduction for high dimensional vector autoregressive models
Authors: Gianluca Cubadda - University of Rome Tor Vergata (Italy) [presenting]
Alain Hecq - Maastricht University (Netherlands)
Abstract: The aim is to decompose a large dimensional vector autoregressive (VAR) model into two components, the first one being generated by a small-scale VAR and the second one being a white noise sequence. Hence, a reduced number of common factors generates the entire dynamics of the large system through a VAR structure. This modelling extends the common feature approach to high dimensional systems, and it differs from the dynamic factor model in which the idiosyncratic component can also embed a dynamic pattern. We show the conditions under which this decomposition exists. We provide statistical tools to detect its presence in the data and to estimate the parameters of the underlying small-scale VAR model. We evaluate the practical value of the proposed methodology by simulations as well as by an empirical application to a large set of US economic variables.
