Penalized time series regression

This chapter covers penalized regression in the framework of linear time series models and reviews the most commonly used penalized estimators in applied work, namely Ridge Regression, the Least Absolute Shrinkage and Selection Operator (Lasso), the Elastic Net, the adaptive versions of the Lasso as well as Elastic Net and the group Lasso. Other penalties are briefly presented. We discuss theoretical properties such as consistent variable selection, the oracle property, and oracle inequalities and list time series models in which penalized estimators have been shown to possess these. Potentially problematic aspects of (some of) these properties are also discussed. Practical issues, such as the selection of the penalty parameters and available computer implementations, are also covered. A Monte Carlo simulation is presented in order to compare different penalties in terms of estimation precision, model selection capability, and forecasting performance. Finally, an application to forecasting US monthly inflation is presented.