Inducing sparsity and shrinkage in time-varying parameter models

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Huber, Florian and Koop, Gary and Onorante, Luca (2021) Inducing sparsity and shrinkage in time-varying parameter models. Journal of Business and Economic Statistics, 39 (3). pp. 669-683. ISSN 0735-0015 (https://doi.org/10.1080/07350015.2020.1713796)

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Abstract

Time-varying parameter (TVP) models have the potential to be over-parameterized, particularly when the number of variables in the model is large. Global-local priors are increasingly used to induce shrinkage in such models. But the estimates produced by these priors can still have appreciable uncertainty. Sparsification has the potential to reduce this uncertainty and improve forecasts. In this article, we develop computationally simple methods which both shrink and sparsify TVP models. In a simulated data exercise, we show the benefits of our shrink-then-sparsify approach in a variety of sparse and dense TVP regressions. In a macroeconomic forecasting exercise, we find our approach to substantially improve forecast performance relative to shrinkage alone.

ORCID iDs

Huber, Florian, Koop, Gary ORCID logoORCID: https://orcid.org/0000-0002-6091-378X and Onorante, Luca;
  • Item type:Article
    ID code:71015
    Dates:
    Date
    Event
    3 July 2021
    Published
    4 February 2020
    Published Online
    16 December 2019
    Accepted
    Subjects:Social Sciences > Economic Theory
    Department:Strathclyde Business School > Economics
    Depositing user: Pure Administrator
    Date deposited:19 Dec 2019 14:45
    Last modified:22 Dec 2024 01:24
    URI:https://strathprints.strath.ac.uk/id/eprint/71015
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