Lag length selection in panel autoregression

Chirok Han, Peter C.B. Phillips, Donggyu Sul

Research output: Contribution to journalArticlepeer-review

15 Citations (Scopus)

Abstract

Model selection by BIC is well known to be inconsistent in the presence of incidental parameters. This article shows that, somewhat surprisingly, even without fixed effects in dynamic panels BIC is inconsistent and overestimates the true lag length with considerable probability. The reason for the inconsistency is explained, and the probability of overestimation is found to be 50% asymptotically. Three alternative consistent lag selection methods are considered. Two of these modify BIC, and the third involves sequential testing. Simulations evaluate the performance of these alternative lag selection methods in finite samples.

Original languageEnglish
Pages (from-to)225-240
Number of pages16
JournalEconometric Reviews
Volume36
Issue number1-3
DOIs
Publication statusPublished - 2017 Mar 16

Keywords

  • BIC
  • X-differencing
  • dynamic panel
  • lag selection
  • sequential testing

ASJC Scopus subject areas

  • Economics and Econometrics

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