Ridge regularized estimation of VAR models for inference

Abstract

Ridge regression is a popular method for dense least squares regularization. In this article, ridge regression is studied in the context of VAR model estimation and inference. The implications of anisotropic penalization are discussed, and a comparison is made with Bayesian ridge‐type estimators. The asymptotic distribution and the properties of cross‐validation techniques are analyzed. Finally, the estimation of impulse response functions is evaluated with Monte Carlo simulations and ridge regression is compared with a number of similar and competing methods.