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 -