TY - UNPB
T1 - Improved inference on cointegrating vectors in the presence of a near unit root using adjusted quantiles
AU - Franchi, Massimo
AU - Johansen, Søren
PY - 2017
Y1 - 2017
N2 - It is well known that inference on the cointegrating relations in a vector autoregression (CVAR) is difficult in the presence of a near unit root. The test for a given cointegration vector can have rejection probabilities under the null, which vary from the nominal size to more than 90%. This paper formulates a CVAR model allowing for many near unit roots and analyses the asymptotic properties of the Gaussian maximum likelihood estimator. Then a critical value adjustment suggested by McCloskey for the test on the cointegrating relations is implemented, and it is found by simulation that it eliminates size distortions and has reasonable power for moderate values of the near unit root parameter. The findings are illustrated with an analysis of a number of different bivariate DGPs.
AB - It is well known that inference on the cointegrating relations in a vector autoregression (CVAR) is difficult in the presence of a near unit root. The test for a given cointegration vector can have rejection probabilities under the null, which vary from the nominal size to more than 90%. This paper formulates a CVAR model allowing for many near unit roots and analyses the asymptotic properties of the Gaussian maximum likelihood estimator. Then a critical value adjustment suggested by McCloskey for the test on the cointegrating relations is implemented, and it is found by simulation that it eliminates size distortions and has reasonable power for moderate values of the near unit root parameter. The findings are illustrated with an analysis of a number of different bivariate DGPs.
KW - Faculty of Social Sciences
KW - Long-run inference
KW - test on cointegrating relations
KW - likelihood inference
KW - vector autoregressive model
KW - near unit roots
KW - Bonferroni type adjusted quantiles
KW - C32
KW - Long-run inference
KW - test on cointegrating relations
KW - likelihood inference
KW - vector autoregressive model
KW - near unit roots
KW - Bonferroni type adjusted quantiles
M3 - Working paper
T3 - University of Copenhagen. Institute of Economics. Discussion Papers (Online)
BT - Improved inference on cointegrating vectors in the presence of a near unit root using adjusted quantiles
ER -