COINTEGRATION AND COMMON FACTORS

Alvaro Escribano and Daniel Peña

Journal of Time Series Analysis, 1994, vol. 15, issue 6, 577-586

Abstract: Abstract. Alternative common factor representations for cointegrated vectors are studied. This is done by embedding them into the dynamic factor model proposed by Peña and Box (Identifying a simplifying structure in time series. J. Am. Statist. Assoc. 82 (1987), 836–43). It is shown that dynamic factor models produce as a particular case the alternative common trend representations for cointegrated variables available in the literature. Furthermore a new normalization is proposed which has the advantage of producing common trend representations with moving‐average polynomials and under certain circumstances with uncorrelated shocks.

Date: 1994
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