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The model I am working on has 4 time series (X, X1, X2, X3). Lag lengths are 5, 1, 4 and 6, respectively. X1, X2 and X3 are stationary at level and X is stationary at second difference. I am applying VAR at level data to find the relationship between them. I have to choose appropriate lag length and I don't know what the lag length should be. Should it be the maximum of the four time series' lags? Or is there any other method?

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  • $\begingroup$ I am using VAR but I am not sure about lag length.That's why I posted the question.I have gone through earlier posts and David Giles blog but I didn't get the answer. $\endgroup$ – user2122922 May 5 '15 at 8:37
  • $\begingroup$ So please ask specifically about lag length. Now the detailed answer to your question would take up whole book. $\endgroup$ – mpiktas May 5 '15 at 8:41
  • $\begingroup$ @mpiktas Edited.Sorry for the trouble but I am new to econometrics and also in this forum. $\endgroup$ – user2122922 May 5 '15 at 8:52
  • $\begingroup$ Note to people voting for closing. The question was too broad, and I cast a vote to close it, but after the edit, it is a valid question, which was not formulated (there were some attempts) or answered here. $\endgroup$ – mpiktas May 5 '15 at 11:22
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In general lag length in VAR models is selected using statistical information criteria. This means that VAR models are fitted for various lengths an certain statistic is calculated. The lag length is taken to be of model with the smallest statistic. Naturally you should think whether lag length from such procedure conforms to your model. Large discrepancies (very large lag length, when it is clear that the impact from the variables at large lags cannot be relevant) usually indicate that something is wrong with model specification.

Although lag length selection is important procedure it is only but a small part of VAR modeling. This is why it is usually mentioned briefly, or omitted entirely. For more examples you can read R package vars vignette. Lag length selection is mentioned in section about cornerstone package functions and in the examples section.

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