Inference in the Presence of Stochastic and Deterministic Trends

Guillaume Chevillon

No DR 07021, ESSEC Working Papers from ESSEC Research Center, ESSEC Business School

Abstract: The focus of this paper is inference about stochastic and deterministic trends when both types are present. We show that, contrary to asymptotic theory and the existing literature, the parameters of the deterministic components must be taken into account in finite samples. We analyze the ubiquitous Likelihood Ratio test for the rank of cointegration in vector processes. Here, we directly control the parameters of the data generating process so that a local-asymptotic framework accounts for small sample interactions between stochastic and deterministic trends. We show that the usual corrections are invalid as they take no account of the relative magnitudes of these two types of trends. Block-local models provide an embedding framework which provides a rationale for consistent estimation and testing of the whole set of parameters. In an empirical application to European GDP series, we show that using usual corrections leads to underestimating the number of stochastic trends.

Keywords: Block Local Models; Cointegration; Finite Samples; Likelihood Ratio; Weak Trends (search for similar items in EconPapers)
JEL-codes: C12 C32 C51 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2007-08
New Economics Papers: this item is included in nep-ecm and nep-ets
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.essec.fr/faculty/showDeclFileRes.do?declId=7538&key=__workpaper__ (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.essec.fr/faculty/showDeclFileRes.do?declId=7538&key=__workpaper__ [301 Moved Permanently]--> https://www.essec.edu/fr/faculty/showDeclFileRes.do?declId=7538&key=__workpaper__)

Related works:
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:ebg:essewp:dr-07021

Access Statistics for this paper

More papers in ESSEC Working Papers from ESSEC Research Center, ESSEC Business School ESSEC Research Center, BP 105, 95021 Cergy, France. Contact information at EDIRC.
Bibliographic data for series maintained by Sophie Magnanou ().