Regression model with too many variables. How to condense the problem? I have a time-series dataset and I am a bit lost how to perform the analysis.
I have an dedependent variable and about 2000 independent variables for some entity over a time period of about 2500 daily observations (like daily consume behavior of an individual over time for 2000 products). 
In fact, those 2000 variables loosely "belong together". To be precise: Each of the 2000 variables can be assigned to one of three "main categories" (e.g., 600 variables belong to main category 1, 1200 belong to main category 2 and 200 to main category 3). Also, the variables belonging to one category are in most cases moderately to highly correlated. 
Obviously, it won't make much sense to run a regression with 2000 independent variables. 
It is completely fine for my purpose to obtain just one coefficient for each "main category variable" (so three coefficients instead of 2000) in the end.
However, I am unaware of techniques to "condense" my variables in three main variables before performing the final regressions. I cannot simply eliminate single variables from the setup to reduce the regressors and, for instance, choose only a subset of "most useful" variables. 
Any ideas how to handle this problem?     
 A: You can first do the Principal Component Analysis of your independent variables and then only do the do the regression of your dependent variable w.r.t. the PCA coefficients.
An alternative to that is to do Lasso regression, i.e. use the regularisation that forces to use the smallest possible number of variables in the regression.
A: You have several options for variable selection depending on what you want to do. But most of them are regularization methods. 
Ridge Regression: uses regularization for variable selection to eliminate variables by having variables converge to zero the fastest get eliminated 
LASSO adds a penalty strength (lambda) to variables that approach zero. Coefficients are set to zero as the lambda parameter increases.
This post would be useful to determine which technique to use When should I use lasso vs ridge?
If you have high amounts of data where there are more features than samples and large amount of correlated use Elastic Nets. Elastic net has a more ridged ridge trace than LASSO.
