Eric Hillebrand

Stein-Rule Estimation and Generalized Shrinkage Methods for Forecasting Using Many Predictors

Publikation: Working paperForskning

Dokumenter

  • Rp12 18

    Indsendt manuskript, 612 KB, PDF-dokument

We examine the Stein-rule shrinkage estimator for possible improvements in estimation and forecasting when there are many predictors in a linear time series model. We consider the Stein-rule estimator of Hill and Judge (1987) that shrinks the unrestricted unbiased OLS estimator towards a restricted biased principal component (PC) estimator. Since the Stein-rule estimator combines the OLS and PC estimators, it is a model-averaging estimator and produces a combined forecast. The conditions under which the improvement can be achieved depend on several unknown parameters that determine the degree of the Stein-rule shrinkage. We conduct Monte Carlo simulations to examine these parameter regions. The overall picture that emerges is that the Stein-rule shrinkage estimator can dominate both OLS and principal components estimators within an intermediate range of the signal-to-noise ratio. If the signal-to-noise ratio is low, the PC estimator is superior. If the signal-to-noise ratio is high, the OLS estimator is superior. In out-of-sample forecasting with AR(1) predictors, the Stein-rule shrinkage estimator can dominate both OLS and PC estimators
when the predictors exhibit low persistence.
OriginalsprogEngelsk
UdgivelsesstedAarhus
UdgiverInstitut for Økonomi, Aarhus Universitet
Antal sider23
StatusUdgivet - 7 maj 2012

    Forskningsområder

  • Stein-rule, shrinkage, risk, variance-bias tradeo, OLS, principal components

Se relationer på Aarhus Universitet Citationsformater

Download-statistik

Ingen data tilgængelig

ID: 45366191