Stable Reduced-Rank VAR Identification

Abstract

The vector autoregression (VAR) has been widely used in system identification, econometrics, natural science, and many other areas. However, when the state dimension becomes large the parameter dimension explodes. So rank reduced modelling is attractive and is well developed. But a fundamental requirement in almost all applications is stability of the fitted model. And this has not been addressed in the rank reduced case. Here, we develop, for the first time, a closed-form formula for an estimator of a rank reduced transition matrix which is guaranteed to be stable. We show that our estimator is consistent and asymptotically statistically efficient and illustrate it in comparative simulations.