A Bayesian Approach to Modelling Bivariate Time-Varying Cointegration and Cointegrating Rank

Chew Chua and Sarantis Tsiaplias

Melbourne Institute Working Paper Series from Melbourne Institute of Applied Economic and Social Research, The University of Melbourne

Abstract: A bivariate model that allows for both a time-varying cointegrating matrix and time-varying cointegrating rank is presented. The model addresses the issue that, in real data, the validity of a constant cointegrating relationship may be questionable. The model nests the sub-models implied by alternative cointegrating matrix ranks and allows for transitions between stationarity and non-stationarity, and cointegrating and non-cointegrating relationships in accordance with the observed behaviour of the data. A Bayesian test of cointegration is also developed. The model is used to assess the validity of the Fisher effect and is also applied to equity market data.

Keywords: Error correction models; singular value decomposition; cointegration tests (search for similar items in EconPapers)
JEL-codes: C11 C32 C51 C52 (search for similar items in EconPapers)
Pages: 41pp
Date: 2014-12
New Economics Papers: this item is included in nep-ecm and nep-ets
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Persistent link: https://EconPapers.repec.org/RePEc:iae:iaewps:wp2014n27

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