Bias-Correction in Vector Autoregressive Models: A Simulation Study

33 Pages Posted: 18 May 2011

See all articles by Tom Engsted

Tom Engsted

University of Aarhus - CREATES

Thomas Quistgaard Pedersen

Aarhus University - CREATES

Date Written: May 11, 2011

Abstract

We analyze and compare the properties of various methods for bias-correcting parameter estimates in vector autoregressions. First, we show that two analytical bias formulas from the existing literature are in fact identical. Next, based on a detailed simulation study, we show that this simple and easy-to-use analytical bias formula compares very favorably to the more standard but also more computer intensive bootstrap bias-correction method, both in terms of bias and mean squared error. Both methods yield a notable improvement over both OLS and a recently proposed WLS estimator. We also investigate the properties of an iterative scheme when applying the analytical bias formula, and we find that this can imply slightly better finite-sample properties for very small sample sizes while for larger sample sizes there is no gain by iterating. Finally, we also pay special attention to the risk of pushing an otherwise stationary model into the non-stationary region of the parameter space during the process of correcting for bias.

Keywords: Bias reduction, VAR model, analytical bias formula, bootstrap, iteration, Yule-Walker, non-stationary system, skewed and fat-tailed data

JEL Classification: C13, C32

Suggested Citation

Engsted, Tom and Pedersen, Thomas Quistgaard, Bias-Correction in Vector Autoregressive Models: A Simulation Study (May 11, 2011). Available at SSRN: https://ssrn.com/abstract=1838373 or http://dx.doi.org/10.2139/ssrn.1838373

Tom Engsted (Contact Author)

University of Aarhus - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Thomas Quistgaard Pedersen

Aarhus University - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

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