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Practical Problems with Reduced-rank ML Estimators for Cointegration Parameters and a Simple Alternative

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Ralf Brüggemann
Helmut Lütkepohl

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Abstract

Johansen's reduced-rank maximum likelihood (ML) estimator for cointegration parameters in vector error correction models is known to produce occasional extreme outliers. Using a small monetary system and German data we illustrate the practical importance of this problem. We also consider an alternative generalized least squares (GLS) system estimator which has better properties in this respect. The two estimators are compared in a small simulation study. It is found that the GLS estimator can indeed be an attractive alternative to ML estimation of cointegration parameters. Copyright 2005 Blackwell Publishing Ltd.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0084.2005.00136.x
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Article provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics & Statistics.

Volume (Year): 67 (2005)
Issue (Month): 5 (October)
Pages: 673-690
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Handle: RePEc:bla:obuest:v:67:y:2005:i:5:p:673-690

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  1. Bossaerts, Peter, 1988. "Common nonstationary components of asset prices," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 347-364. [Downloadable!] (restricted)
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  1. Mehrotra, Aaron, 2006. "Demand for money in transition: Evidence from China's disinflation," BOFIT Discussion Papers 10/2006, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
    Other versions:
  2. Christian Dreger & Jürgen Wolters, 2008. "M3 Money Demand and Excess Liquidity in the Euro Area," Working Paper / FINESS 7.1a, DIW Berlin, German Institute for Economic Research. [Downloadable!]
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  3. Breitung, J. & Pesaran, M.H., 2005. "Unit Roots and Cointegration in Panels," Cambridge Working Papers in Economics 0535, Faculty of Economics, University of Cambridge. [Downloadable!]
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  4. Badi H. Baltagi & Zijun Wang, 2006. "Testing for Cointegrating Rank via Model Selection: Evidence from 165 Data Sets," Center for Policy Research Working Papers 83, Center for Policy Research, Maxwell School, Syracuse University. [Downloadable!]
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  5. Ralf Brueggemann & Helmut Luetkepohl, 2004. "A Small Monetary System for the Euro Area Based on German Data," Economics Working Papers ECO2004/24, European University Institute. [Downloadable!]
    Other versions:
  6. Korhonen, Iikka & Mehrotra, Aaron, 2007. "Money demand in post-crisis Russia: De-dollarisation and re-monetisation," BOFIT Discussion Papers 14/2007, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
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