Model selection and associated issues of post-model selection inference present well known challenges in empirical econometric research. These modeling issues are manifest in all applied work but they are particularly acute in multivariate time series settings such as cointegrated systems where multiple interconnected decisions can materially aﬀect the form of the model and its interpretation. In cointegrated system modeling, empirical estimation typically proceeds in a stepwise manner that involves the determination of cointegrating rank and autoregressive lag order in a reduced rank vector autoregression followed by estimation and inference. This paper proposes an automated approach to cointegrated system modeling that uses adaptive shrinkage techniques to estimate vector error correction models with unknown cointegrating rank structure and unknown transient lag dynamic order. These methods enable simultaneous order estimation of the cointegrating rank and autoregressive order in conjunction with oracle-like eﬀicient estimation of the cointegrating matrix and transient dynamics. As such they oﬀer considerable advantages to the practitioner as an automated approach to the estimation of cointegrated systems. The paper develops the new methods, derives their limit theory, reports simulations and presents an empirical illustration with macroeconomic aggregates.
Liao, Zhipeng and Phillips, Peter C.B., "Automated Estimation of Vector Error Correction Models" (2012). Cowles Foundation Discussion Papers. 2237.