Journal
ECONOMETRICA
Volume 80, Issue 6, Pages 2667-2732Publisher
WILEY
DOI: 10.3982/ECTA9299
Keywords
Cofractional processes; cointegration rank; fractional cointegration; likelihood inference; vector autoregressive model
Categories
Funding
- Danish Social Sciences Research Council [275-05-0220]
- Social Sciences and Humanities Research Council of Canada [410-2009-0183]
- Center for Research in Econometric Analysis of Time Series (CREATES)
- Danish National Research Foundation
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We consider model based inference in a fractionally cointegrated (or cofractional) vector autoregressive model, based on the Gaussian likelihood conditional on initial values. We give conditions on the parameters such that the process X-t is fractional of order d and cofractional of order d-b; that is, there exist vectors beta for which beta'X-t is fractional of order d-b and no other fractionality order is possible. For b=1, the model nests the I(d-1) vector autoregressive model. We define the statistical model by 0 <= bd, but conduct inference when the true values satisfy 0 <= d(0)- b(0) <= 1/2 and b(0) not equal 1/2, for which beta(0)'X-t is (asymptotically) a stationary process. Our main technical contribution is the proof of consistency of the maximum likelihood estimators. To this end, we prove weak convergence of the conditional likelihood as a continuous stochastic process in the parameters when errors are independent and identically distributed with suitable moment conditions and initial values are bounded. Because the limit is deterministic, this implies uniform convergence in probability of the conditional likelihood function. If the true value b0 > 1/2, we prove that the limit distribution of is mixed Gaussian, while for the remaining parameters it is Gaussian. The limit distribution of the likelihood ratio test for cointegration rank is a functional of fractional Brownian motion of type II. If b(0) < 1/2, all limit distributions are Gaussian or chi-squared. We derive similar results for the model with d = b, allowing for a constant term.
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