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A Regularization Approach for Estimation and Variable Selection in High Dimensional Regression

Model selection and estimation are important topics in econometric analysis which can become considerably complicated in high dimensional settings, where the set of possible regressors can become larger than the set of available observations. For large scale problems the penalized regression methods (e.g. Lasso) have become the de facto benchmark that can effectively trade off parsimony and fit. In this paper we introduce a regularized estimation and model selection approach that is based on sparse large covariance matrix estimation, introduced by Bickel and Levina (2008) and extended by Dendramis, Giraitis, and Kapetanios (2018). We provide asymptotic and small sample results that indicate that our approach can be an important alternative to the penalized regression. Moreover, we also introduce a number of extensions that can improve the asymptotic and small sample performance of the proposed method. The usefulness of what we propose is illustrated via Monte Carlo exercises and an empirical application in macroeconomic forecasting.