NORMING RATES AND LIMIT THEORY FOR SOME TIME-VARYING COEFFICIENT AUTOREGRESSIONS

Offer Lieberman and Peter Phillips

Journal of Time Series Analysis, 2014, vol. 35, issue 6, 592-623

Abstract: type="main" xml:id="jtsa12083-abs-0001"> A time-varying autoregression is considered with a similarity-based coefficient and possible drift. It is shown that the random-walk model has a natural interpretation as the leading term in a small-sigma expansion of a similarity model with an exponential similarity function as its AR coefficient. Consistency of the quasi-maximum likelihood estimator of the parameters in this model is established, the behaviours of the score and Hessian functions are analysed and test statistics are suggested. A complete list is provided of the normalization rates required for the consistency proof and for the score and Hessian function standardization. A large family of unit root models with stationary and explosive alternatives is characterized within the similarity class through the asymptotic negligibility of a certain quadratic form that appears in the score function. A variant of the stochastic unit root model within the class is studied, and a large-sample limit theory provided, which leads to a new nonlinear diffusion process limit showing the form of the drift and conditional volatility induced by sustained stochastic departures from unity. The findings provide a composite case for time-varying coefficient dynamic modelling. Some simulations and a brief empirical application to data on international Exchange Traded Funds are included. Copyright © 2014 Wiley Publishing Ltd

Date: 2014
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Working Paper: Norming Rates and Limit Theory for Some Time-Varying Coefficient Autoregressions (2013)
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