Fractional Cointegration Rank Estimation

Katarzyna Łasak and Carlos Velasco

Journal of Business & Economic Statistics, 2015, vol. 33, issue 2, 241-254

Abstract: This article considers cointegration rank estimation for a p -dimensional fractional vector error correction model. We propose a new two-step procedure that allows testing for further long-run equilibrium relations with possibly different persistence levels. The first step consists of estimating the parameters of the model under the null hypothesis of the cointegration rank r = 1, 2, ..., p - 1. This step provides consistent estimates of the order of fractional cointegration, the cointegration vectors, the speed of adjustment to the equilibrium parameters and the common trends. In the second step we carry out a sup-likelihood ratio test of no-cointegration on the estimated p - r common trends that are not cointegrated under the null. The order of fractional cointegration is reestimated in the second step to allow for new cointegration relationships with different memory. We augment the error correction model in the second step to adapt to the representation of the common trends estimated in the first step. The critical values of the proposed tests depend only on the number of common trends under the null, p - r , and on the interval of the orders of fractional cointegration b allowed in the estimation, but not on the order of fractional cointegration of already identified relationships. Hence, this reduces the set of simulations required to approximate the critical values, making this procedure convenient for practical purposes. In a Monte Carlo study we analyze the finite sample properties of our procedure and compare with alternative methods. We finally apply these methods to study the term structure of interest rates.

Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://hdl.handle.net/10.1080/07350015.2014.945589 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Fractional cointegration rank estimation (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:jnlbes:v:33:y:2015:i:2:p:241-254

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/UBES20

DOI: 10.1080/07350015.2014.945589

Access Statistics for this article

Journal of Business & Economic Statistics is currently edited by Eric Sampson, Rong Chen and Shakeeb Khan

More articles in Journal of Business & Economic Statistics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().