Time-Varying Parameters as Ridge Regressions. (arXiv:2009.00401v3 [econ.EM] UPDATED)

Time-varying parameters (TVPs) models are frequently used in economics to
capture structural change. I highlight a rather underutilized fact -- that
these are actually ridge regressions. Instantly, this makes computations,
tuning, and implementation much easier than in the state-space paradigm. Among
other things, solving the equivalent dual ridge problem is computationally very
fast even in high dimensions, and the crucial "amount of time variation" is
tuned by cross-validation. Evolving volatility is dealt with using a two-step
ridge regression. I consider …

algorithm arxiv change economics highlight implementation paradigm regression ridge space sparsity state validation