Series Estimation of Stochastic Processes: Recent Developments and Econometric Applications

Peter Phillips and Zhipeng Liao

No 1871, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: This paper overviews recent developments in series estimation of stochastic processes and some of their applications in econometrics. Underlying this approach is the idea that a stochastic process may under certain conditions be represented in terms of a set of orthonormal basis functions, giving a series representation that involves deterministic functions. Several applications of this series approximation method are discussed. The first shows how a continuous function can be approximated by a linear combination of Brownian motions (BMs), which is useful in the study of the spurious regressions. The second application utilizes the series representation of BM to investigate the effect of the presence of deterministic trends in a regression on traditional unit-root tests. The third uses basis functions in the series approximation as instrumental variables (IVs) to perform efficient estimation of the parameters in cointegrated systems. The fourth application proposes alternative estimators of long-run variances in some econometric models with dependent data, thereby providing autocorrelation robust inference methods in these models. We review some work related to these applications and some ongoing research involving series approximation methods.

Keywords: Cointegrated system, HAC estimation; Instrumental variables, Lasso regression, Karhunen-Loeve representation, Long-run variance, Reproducing kernel Hilbert space, Oracle effciency, Orthonormal system, Trend basis (search for similar items in EconPapers)
JEL-codes: C22 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2012-09
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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