Power and Bias of Likelihood Based Inference in the Cointegration Model under Fractional Cointegration
AbstractThis paper investigates how fractional cointegration affects the common maximum likelihood cointegration procedure. It is shown that the likelihood ratio test of no cointegration has considerable power against fractional alternatives. In contrast to the case of a cointegrated system, the usual maximum likelihood estimator gives severely biased estimates of the long-run relation under fractional cointegration. This suggests that the standard likelihood approach should be used with caution and that a test to separate fractionally cointegrated series from series that are cointegrated of an integer order should be executed prior to estimation.
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Bibliographic InfoPaper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 221.
Length: 20 pages
Date of creation: 24 Feb 1998
Date of revision:
Publication status: Published in Economics Letters, 1999, pages 143-147.
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Error correction; likelihood ratio test; maximum likelihood; fractional integration;
Find related papers by JEL classification:
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
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- Lyhagen, Johan, 1998. "Maximum likelihood estimation of the multivariate fractional cointegrating model," Working Paper Series in Economics and Finance, Stockholm School of Economics 233, Stockholm School of Economics.
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