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Hierarchical Shrinkage Priors for Dynamic Regressions with Many Predictors

Author

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  • Dimitris Korobilis

    (Université Catholique de Louvain; The Rimini Centre for Economic Analysis (RCEA))

Abstract

This paper builds on a simple unified representation of shrinkage Bayes estimators based on hierarchical Normal-Gamma priors. Various popular penalized least squares estimators for shrinkage and selection in regression models can be recovered using this single hierarchical Bayes formulation. Using 129 U.S. macroeconomic quarterly variables for the period 1959 – 2010 I exhaustively evaluate the forecasting properties of Bayesian shrinkage in regressions with many predictors. Results show that for particular data series hierarchical shrinkage dominates factor model forecasts, and hence it becomes a valuable addition to existing methods for handling large dimensional data.

Suggested Citation

  • Dimitris Korobilis, 2011. "Hierarchical Shrinkage Priors for Dynamic Regressions with Many Predictors," Working Paper series 21_11, Rimini Centre for Economic Analysis.
    • Handle: RePEc:rim:rimwps:21_11
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    More about this item

    Keywords

    Forecasting; shrinkage; factor model; variable selection; Bayesian LASSO;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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