Econometric Inference in the Vicinity of Unity

Peter Phillips and Tassos Magdalinos Author Email:
Additional contact information
Tassos Magdalinos Author Email:: University of Nottingham, UK

Working Papers from Singapore Management University, Sim Kee Boon Institute for Financial Economics

Abstract: Present econometric methodology of inference in cointegrating regression is extended to mildly integrated time series of the type introduced by Magdalinos and Phillips (2007, 2009). It is well known that conventional approaches to estimating cointegrat- ing regressions fail to produce even asymptotically valid inference procedures when the regressors are nearly integrated, and substantial size distortions can occur in econometric testing. The new framework developed here enables a general approach to inference that resolves this difficulty and is robust to the persistence character- istics of the regressors, making it suitable for general practical application. Mildly integrated instruments are employed, one using system regressors and internally gen- erated instruments, the other using external instruments. These new IV techniques eliminate the endogeneity problems of conventional cointegration methods with near integrated regressors and robustify inference to uncertainty over the precise nature of the integration in the system. The use of mildly integrated instruments also provides a mechanism for linking the conventional treatment of endogeneity in simultaneous equations with the econometric methodology for cointegrated systems. The methods are easily implemented, widely applicable and help to alleviate practical concerns about the use of cointegration methodology when roots are in the vicinity of unity rather than precisely at unity.

Keywords: Central limit theory; Cointegration; Endogeneity bias; Instrumentation; Mild integration; Mixed normality; Robustness; Simultaneity. (search for similar items in EconPapers)
JEL-codes: C22 C32 (search for similar items in EconPapers)
Pages: 37 Pages
Date: 2009-04
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Published in SMU-SKBI CoFie Working Paper

Downloads: (external link)
http://www.smu.edu.sg/institutes/skbife/downloads/ ... ity%20of%20Unity.pdf

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:skb:wpaper:cofie-06-2009

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Papers from Singapore Management University, Sim Kee Boon Institute for Financial Economics Contact information at EDIRC.
Bibliographic data for series maintained by Jaymie Xu ().