Functional cointegration: definition and nonparametric estimation

Anurag Banerjee () and Jean-Yves Pitarakis

Studies in Nonlinear Dynamics & Econometrics, 2014, vol. 18, issue 5, 507-520

Abstract: We formally define a concept of functional cointegration linking the dynamics of two time series via a functional coefficient. This is achieved through the use of a concept of summability as an alternative to I(1)’ness which is no longer suitable under nonlinear dynamics. We subsequently introduce a nonparametric approach for estimating the unknown functional coefficients. Our method is based on a piecewise local least squares principle and is computationally simple to implement. We establish its consistency properties and evaluate its performance in finite samples. We subsequently illustrate its usefulness through an application that explores linkages between stock prices and dividends via a sentiment indicator.

Keywords: cointegration; functional coefficients; piecewise local linear estimation; unit roots (search for similar items in EconPapers)
JEL-codes: C22 C50 (search for similar items in EconPapers)
Date: 2014
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Working Paper: Functional cointegration: definition and nonparametric estimation (2012)
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DOI: 10.1515/snde-2013-0083

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