Half-Life Estimation based on the Bias-Corrected Bootstrap: A Highest Density Region Approach

Jae Kim, Param Silvapulle () and Rob Hyndman

No 11/06, Monash Econometrics and Business Statistics Working Papers from Monash University, Department of Econometrics and Business Statistics

Abstract: The half-life is defined as the number of periods required for the impulse response to a unit shock to a time series to dissipate by half. It is widely used as a measure of persistence, especially in international economics to quantify the degree of mean reversion of the deviation from an international parity condition. Several studies have proposed bias-corrected point and interval estimation methods. However, they have found that the confidence intervals are rather uninformative with their upper bound being either extremely large or infinite. This is largely due to the distribution of the half-life estimator being heavily skewed and multi-modal. In this paper, we propose a bias-corrected bootstrap procedure for the estimation of half-life, adopting the highest density region (HDR) approach to point and interval estimation. Our Monte Carlo simulation results reveal that the bias-corrected bootstrap HDR method provides an accurate point estimator, as well as tight confidence intervals with superior coverage properties to those of its alternatives. As an application, the proposed method is employed for half-life estimation of the real exchange rates of seventeen industrialized countries. The results indicate much faster rates of mean-reversion than those reported in previous studies.

Keywords: Autoregressive Model; Bias-correction; Bootstrapping; Confidence interval; Half-life; Highest density region. (search for similar items in EconPapers)
JEL-codes: C15 C22 F37 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2006-06
New Economics Papers: this item is included in nep-ecm and nep-ets
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Half-life estimation based on the bias-corrected bootstrap: A highest density region approach (2007)
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