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Nonparametric Cointegration Analysis of Fractional Systems With Unknown Integration Orders

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  • Morten Ørregaard Nielsen

    ()
    (Queens University, Canada and CREATES, University of Aarhus, Denmark)

Abstract

In this paper a nonparametric variance ratio testing approach is proposed for determining the cointegration rank in fractionally integrated systems. The test statistic is easily calculated without prior knowledge of the integration order of the data, the strength of the cointegrating relations, or the cointegration vector(s). The latter property makes it easier to implement than regression-based approaches, especially when examining relationships between several variables with possibly multiple cointegrating vectors. Since the test is nonparametric, it does not require the specification of a particular model and is invariant to short-run dynamics. Nor does it require the choice of any smoothing parameters that change the test statistic without being reflected in the asymptotic distribution. Furthermore, a consistent estimator of the cointegration space can be obtained from the procedure. The asymptotic distribution theory for the proposed test is non-standard but easily tabulated or simulated. Monte Carlo simulations demonstrate excellent finite sample properties, even rivaling those of well-specified parametric tests. The proposed methodology is applied to the term structure of interest rates, where, contrary to both fractional and integer-based parametric approaches, evidence in favor of the expectations hypothesis is found using the nonparametric approach.

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Bibliographic Info

Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2009-02.

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Length: 37
Date of creation: 12 Jan 2009
Date of revision:
Handle: RePEc:aah:create:2009-02

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Web page: http://www.econ.au.dk/afn/

Related research

Keywords: Cointegration rank; cointegration space; fractional integration and cointegration; interest rates; long memory; nonparametric; term structure; variance ratio;

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Citations

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Cited by:
  1. Katarzyna Lasak & Carlos Velasco, 2014. "Fractional Cointegration Rank Estimation," Tinbergen Institute Discussion Papers, Tinbergen Institute 14-021/III, Tinbergen Institute.
  2. Guglielmo Maria Caporale & Luis A. Gil-Alana, 2011. "Fractional Integration and Cointegration in US Financial Time Series Data," Discussion Papers of DIW Berlin 1116, DIW Berlin, German Institute for Economic Research.
  3. Daniela Osterrieder, 2013. "Interest Rates with Long Memory: A Generalized Affine Term-Structure Model," CREATES Research Papers, School of Economics and Management, University of Aarhus 2013-17, School of Economics and Management, University of Aarhus.
  4. Daniela Osterrieder & Peter C. Schotman, 2012. "The Volatility of Long-term Bond Returns: Persistent Interest Shocks and Time-varying Risk Premiums," CREATES Research Papers, School of Economics and Management, University of Aarhus 2012-35, School of Economics and Management, University of Aarhus.
  5. Esben Hoeg & Per Frederiksen, 2006. "The Fractional OU Process: Term Structure Theory and Application," Computing in Economics and Finance 2006, Society for Computational Economics 194, Society for Computational Economics.
  6. Dechert, Andreas, 2012. "Variance Ratio Testing for Fractional Cointegration in Presence of Trends and Trend Breaks," MPRA Paper 41044, University Library of Munich, Germany.

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