[Talks@IDSIA] Monday 6 August, about 10:00 "Prediction of singular VARs and application to generalized dynamic factor models"

Title: Prediction of singular VARs and application to generalized dynamic factor models Abstract : Vector autoregressive processes (VARs) with innovations having a singular covariance matrix (in short singular VARs) appear naturally in the context of dynamic factor models. The Yule-Walker estimator of such a VAR is problematic, because the solution of the corresponding equation system tends to be numerically rather unstable. For example, if we overestimate the order of the VAR, then the singularity of the innovations renders the Yule-Walker equation system singular as well. Moreover, even with correctly selected order, the Yule-Walker system tends be close to singular in finite sample. In this paper we are going to show that this has a severe impact on predictions. While the asymptotic rate of the mean square prediction error (MSPE) can be just like in the regular (non-singular) case, the finite sample behaviour is suffering. This effect will turn out to be particularly dramatic in context of dynamic factor models, where we do not directly observe the so-called common components which we aim to predict. Then, when the data are sampled with some additional error, the MSPE often gets severely inflated. We will explain the reason for this phenomenon and show how to overcome the problem. Our numerical results underline that it is very important to adapt prediction algorithms accordingly. Speaker Gilles Nisol, post-doc researcher at ULB (Universite' Libre de Bruxelles) Location Idsia's Meeting Room