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A Bayesian Approach to Modeling Time-Varying Cointegration and Cointegrating Rank

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  • Chew Lian Chua
  • Sarantis Tsiaplias

Abstract

A multivariate model that allows for both a time-varying cointegrating matrix and time-varying cointegrating rank is presented. The model addresses the issue that, in real data, the validity of a constant cointegrating relationship may be questionable. The model nests the submodels implied by alternative cointegrating matrix ranks and allows for transitions between stationarity and nonstationarity, and cointegrating and noncointegrating relationships in accordance with the observed behavior of the data. A Bayesian test of cointegration is also developed. The model is used to assess the validity of the Fisher effect and is also applied to equity market data.

Suggested Citation

  • Chew Lian Chua & Sarantis Tsiaplias, 2018. "A Bayesian Approach to Modeling Time-Varying Cointegration and Cointegrating Rank," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 36(2), pages 267-277, April.
    • Handle: RePEc:taf:jnlbes:v:36:y:2018:i:2:p:267-277
    DOI: 10.1080/07350015.2016.1166117
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    Cited by:

    1. Costola, Michele & Iacopini, Matteo, 2023. "Measuring sovereign bond fragmentation in the Eurozone," Finance Research Letters, Elsevier, vol. 51(C).
    2. Costola, Michele & Iacopini, Matteo & Santagiustina, Carlo R.M.A., 2021. "On the “mementum” of meme stocks," Economics Letters, Elsevier, vol. 207(C).
    3. Kapetanios, George & Millard, Stephen & Price, Simon & Petrova, Katerina, 2018. "Time varying cointegration and the UK Great Ratios," Essex Finance Centre Working Papers 23320, University of Essex, Essex Business School.
    4. Niko Hauzenberger & Michael Pfarrhofer & Luca Rossini, 2020. "Sparse time-varying parameter VECMs with an application to modeling electricity prices," Papers 2011.04577, arXiv.org, revised Apr 2023.
    5. Li, Leon, 2022. "The dynamic interrelations of oil-equity implied volatility indexes under low and high volatility-of-volatility risk," Energy Economics, Elsevier, vol. 105(C).

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