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Nelson And Plosser Revisited: Evidence From Fractional Arima Models

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  • Guglielmo Maria Caporale
  • Luis A. Gil-Alana

Abstract

In this paper fractionally integrated ARIMA (ARFIMA) models are estimated using an extended version of Nelson and Plosser’s (1982) dataset. The analysis employs Sowell’s (1992) maximum likelihood procedure. Such a parametric approach requires the model to be correctly specified in order for the estimates to be consistent. A model-selection procedure based on diagnostic tests on the residuals, together with several likelihood criteria, is adopted to determine the correct specification for each series. The results suggest that all series, except unemployment and bond yields, are integrated of order greater than one. Thus, the standard approach of taking first differences may result in stationary series with long memory behaviour.

Suggested Citation

  • Guglielmo Maria Caporale & Luis A. Gil-Alana, 2004. "Nelson And Plosser Revisited: Evidence From Fractional Arima Models," Public Policy Discussion Papers 04-16, Economics and Finance Section, School of Social Sciences, Brunel University.
    • Handle: RePEc:bru:bruppp:04-16
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    File URL: http://www.brunel.ac.uk/329/efwps/04-16.pdf
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    JEL classification:

    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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