Estimation and Inference in Models of Cointegration: A Simulation Study

Peter Phillips and Bruce Hansen ()

No 881, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: This paper studies the finite sample distributions of estimators of the cointegrating vector of linear regression models with I(1) variables. Attention is concentrated on the least squares (OLS) and instrumental variables (IV) methods analyzed in other recent work (Phillips and Hansen (1988)). The general preference of OLS to IV techniques suggested by asymptotic theory is reinforced by our simulations. An exception arises for cases of low signal to noise, where spurious IV techniques (so named for their use of instruments that are structurally unrelated to the model) outperform uncorrected least squares. We verify the presence of a small sample estimation bias and show that the Park-Phillips bias correction does reduce the magnitude of this problem. We also find that there is substantial distributional divergence of t-statistics from the normal, unless the Phillips-Hansen endogeneity correction is used. Finally, we apply these methods to aggregate consumption and income data. Our empirical results indicate that the endogeneity and serial dependence connections are important and lead to intuitively plausible changes in the estimated coefficients.

Keywords: Co-integration; endogeneity; instrumental variables; nonstationary series; asymptotic theory (search for similar items in EconPapers)
Pages: 38 pages
Date: 1988-07
Note: CFP 747.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Published in Advances in Econometrics, Vol. 8, JAI Press, 1990, pp. 225-248

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