Limit Theory and Inference in Non-cointegrated Functional Coefficient Regression

Ying Wang, Peter Phillips and Yundong Tu
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Ying Wang: Renmin University of China
Yundong Tu: Peking University

No 2399, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: Functional coefficient (FC) cointegrating regressions offer empirical investigators flexibility in modeling economic relationships by introducing covariates that influence the direction and intensity of comovement among nonstationary time series. FC regression models are also useful when formal cointegration is absent, in the sense that the equation errors may themselves be nonstationary, but where the nonstationary series display well-defined FC linkages that can be meaningfully interpreted as correlation measures involving the covariates. The present paper proposes new nonparametric estimators for such FC regression models where the nonstationary series display linkages that enable consistent estimation of the correlation measures between them. Specifically, we develop Ãn-consistent estimators for the functional coefficient and establish their asymptotic distributions, which involve mixed normal limits that facilitate inference. Two novel features that appear in the limit theory are (i) the need for non- diagonal matrix normalization due to the presence of stationary and nonstationary components in the regression; and (ii) random bias elements that appear in the asymptotic distribution of the kernel estimators, again resulting from the nonstationary regression components. Numerical studies reveal that the proposed estimators achieve significant efficiency improvements compared to the estimators suggested in earlier work by Sun et al. (2011). Easily implementable specification tests with standard chi-square asymptotics are suggested to check for constancy of the functional coefficient. These tests are shown to have faster divergence rate under local alternatives and enjoy superior performance in simulations than tests proposed recently in Gan et al. (2014). An empirical application based on the quantity theory of money illustrates the practical use of correlated but non-cointegrated regression relations.

Keywords: Cointegration; Correlation measure; Functional coefficient regression; Marginal integration; Nonstationary time series. (search for similar items in EconPapers)
JEL-codes: C14 C22 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2024-04
New Economics Papers: this item is included in nep-ecm and nep-ets
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