In a high dimensional linear predictive regression where the number of potential predictors can be larger than the sample size, we consider using LASSO, a popular L1-penalized regression method, to estimate the sparse coefficients when many unit root regressors are present. Consistency of LASSO relies on two building blocks: the deviation bound of the cross product of the regressors and the error term, and the restricted eigenvalue of the Gram matrix of the regressors. In our setting where unit root regressors are driven by temporal dependent non-Gaussian innovations, we establish original probabilistic bounds for these two building blocks. The bounds imply that the rates of convergence of LASSO are different from those in the familiar cross sectional case. In practical applications given a mixture of stationary and nonstationary predictors, asymptotic guarantee of LASSO is preserved if all predictors are scale-standardized. In an empirical example of forecasting the unemployment rate with many macroeconomic time series, strong performance is delivered by LASSO when the initial specification is guided by macroeconomic domain expertise.
The global financial crisis and Covid recession have renewed discussion concerning trend-cycle discovery in macroeconomic data, and boosting has recently upgraded the popular HP filter to a modern machine learning device suited to data-rich and rapid computational environments. This paper sheds light on its versatility in trend-cycle determination, explaining in a simple manner both HP filter smoothing and the consistency delivered by boosting for general trend detection. Applied to a universe of time series in FRED databases, boosting outperforms other methods in timely capturing downturns at crises and recoveries that follow. With its wide applicability the boosted HP filter is a useful automated machine learning addition to the macroeconometric toolkit.
This paper proposes a new test of overidentifying restrictions (called the Q test) with high-dimensional data. This test is based on estimation and inference for a quadratic form of high-dimensional parameters. It is shown to have the desired asymptotic size and power properties under heteroskedasticity, even if the number of instruments and covariates is larger than the sample size. Simulation results show that the new test performs favorably compared to existing alternative tests (Chao et al., 2014; Kolesar, 2018; Carrasco and Doukali, 2021) under the scenarios when those tests are feasible or not. An empirical example of the trade and economic growth nexus manifests the usefulness of the proposed test.