A message coming out of the recent Bayesian literature on cointegration is that it is important to elicit a prior on the space spanned by the cointegrating vectors (as opposed to a particular identified choice for these vectors). In this note, we discuss a sensible way of eliciting such a prior. Furthermore, we develop a collapsed Gibbs sampling algorithm to carry out efficient posterior simulation in cointegration models. The computational advantages of our algorithm are most pronounced with our model, since the form of our prior precludes simple posterior simulation using conventional methods (e.g. a Gibbs sampler involves non-standard posterior conditionals). However, the theory we draw upon implies our algorithm will be more efficient even than the posterior simulation methods which are used with identified versions of cointegration models.
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Paper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number
05/13.
Length: Date of creation: Jul 2005 Date of revision:
Apr 2006 Handle: RePEc:lec:leecon:05/13
Contact details of provider: Postal: Department of Economics University of Leicester, University Road. Leicester. LE1 7RH. UK Phone: +44 (0)116 252 2887 Fax: +44 (0)116 252 2908 Email: Web page: http://www.le.ac.uk/economics/
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