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A Saddlepoint Approximation to the Distribution of the Half-Life Estimator in an Autoregressive Model: New Insights Into the PPP Puzzle

Qian Chen and David Giles ()

No 703, Econometrics Working Papers from Department of Economics, University of Victoria

Abstract: We derive saddlepoint approximations for the density and distribution functions of the half-life estimated by OLS from an AR(1) or AR(p) model. Our analytic results are used to prove that none of the integer-order moments of these half-life estimators exist. This provides an explanation for the unreasonably large estimates of persistency associated with the purchasing power parity “puzzle”, and it also explains the excessively wide confidence intervals reported in the empirical PPP literature.

Keywords: Saddlepoint approximation; half-life estimator; PPP puzzle (search for similar items in EconPapers)
JEL-codes: C13 C22 F31 F41 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2007-05-28
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-ifn
Note: ISSN 1485-6441
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Persistent link: https://EconPapers.repec.org/RePEc:vic:vicewp:0703

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