Which of the following could be viewed as a disadvantage of the vector autoregressive (VAR) approach to modelling?
A) We do not need to specify which variables are endogenous and which are exogenous
B) Standard form VARs can be estimated equation-by-equation using OLS
C) VARs often contain a large number of terms
D) VARs can be expressed using a very compact notation.

Question

Quizplus · Accepted Answer

VAR models often include many parameters due to the inclusion of lagged values of all the variables in each equation. This can lead to issues with estimation, such as overfitting and reduced degrees of freedom, making it a notable disadvantage.

Which of the Following Could Be Viewed as a Disadvantage