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Error correction in DHSY

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Author Info

  • Eliasson, Ann-Charlotte

    (Deutsche Bank, Fixed Income & Relative Value Research)

  • Teräsvirta, Timo

    ()
    (Dept. of Economic Statistics, Stockholm School of Economics)

Abstract

In this note, we consider the contradiction between the fact that the best fit for the UK consumption data in Davidson et al. (1978) is obtained using an equation with an intercept but without an error correction term, whereas the equation with error correction and without the intercept has better post-sample forecasting properties than the former equation. This contradiction is explained and the two equations reconciled in a nonlinear framework by applying a smooth transition regression model to the data.

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File URL: http://swopec.hhs.se/hastef/papers/hastef0517.pdf
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Bibliographic Info

Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 517.

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Length: 8 pages
Date of creation: 21 Nov 2002
Date of revision:
Handle: RePEc:hhs:hastef:0517

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Keywords: consumption equation; model misspecification testing; nonlinearity; smooth transition regression;

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  1. Neil R. Ericsson & James G. MacKinnon, 2000. "Distributions of Error Correction Tests for Cointegration," Econometric Society World Congress 2000 Contributed Papers 0561, Econometric Society.
  2. Davidson, James E H, et al, 1978. "Econometric Modelling of the Aggregate Time-Series Relationship between Consumers' Expenditure and Income in the United Kingdom," Economic Journal, Royal Economic Society, vol. 88(352), pages 661-92, December.
  3. Clements,Michael & Hendry,David, 1998. "Forecasting Economic Time Series," Cambridge Books, Cambridge University Press, number 9780521634809, October.
  4. Steven Cook & Sean Holly & Paul Turner, 1999. "DHSY revisited: the role of asymmetries," Applied Economics, Taylor & Francis Journals, vol. 31(7), pages 775-778.
  5. Granger, C. W. J., 1981. "Some properties of time series data and their use in econometric model specification," Journal of Econometrics, Elsevier, vol. 16(1), pages 121-130, May.
  6. Steven Cook, 2000. "Frequency domain and time series properties of asymmetric error correction terms," Applied Economics, Taylor & Francis Journals, vol. 32(3), pages 297-304.
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