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How can you constrain the Flexible Least Squares regression?

asked 2014-01-09 10:00:52 +0000

OYassin gravatar image

I'm trying to run an FLS regression on a dataset and I basically want to constrain it so that at any given time period, the sum of the coefficients/betas adds up to 1 as a condition.

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answered 2014-01-09 12:41:51 +0000

Constraints in regression models in SHAZAM are possible using the RESTRICT Command however constraining an FLS is not supported by this command.

There are some recent papers that describe how this might be possible. Please see the following important page related to FLS: http://www2.econ.iastate.edu/tesfatsi/flshome.htm. One interesting reference on that page is:

Michael Markov, Vadim Mottl, and Ilya Muchnik (2004), "Principles of Nonstationary Regression Estimation: A New Approach to Dynamic Multi-Factor Models in Finance"

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Thanks for the help. However, I actually got to SHAZAM after exploring this paper in detail. That's the exact process/model that I want to replicate on SHAZAM, the only small missing piece is that the asset weights have to add up to 1 since they're part of a whole. Do you know of a workaround?

OYassin gravatar imageOYassin ( 2014-01-09 12:55:00 +0000 )edit
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answered 2014-01-10 13:27:30 +0000

updated 2014-01-24 06:06:53 +0000

For a fixed constraint you can substitute the constraint into the equation. e.g.

Y = a + bX + (1-b)Z

becomes

Y = (a-1) + b(X-Z)

It might be worth trying to contact the authors and see if they will share their SHAZAM code.

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Asked: 2014-01-09 10:00:52 +0000

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Last updated: Jan 24 '14