ON THE ROBUSTNESS OF HYPOTHESIS TESTING BASED ON FULLY MODIFIED VECTOR AUTOREGRESSION WHEN SOME ROOTS ARE ALMOST ONE

Heikki Kauppi

Econometric Theory, 2004, vol. 20, issue 02, pages 341-359

Abstract: This paper proves that the fully modified vector autoregression (FM-VAR) estimator has second-order bias effects when some roots are local to unity. These bias effects are shown to result in potentially severe size distortions in FM-VAR testing when the hypothesis involves near unit root variables. In addition, the paper reveals that with the FM-VAR method near unit roots become estimated as exact unit roots with convergence speed faster than the order of the sample size. Also this result implies problems for FM-VAR testing, as such hyperconsistent estimates give rise to degenerate limit distributions under the null hypothesis.

Date: 2004

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Persistent link: http://EconPapers.repec.org/RePEc:cup:etheor:v:20:y:2004:i:02:p:341-359_20

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