Instrumental Variable Interpretation of Cointegration with Inference Results for Fractional Cointegration
AbstractIn this paper we propose an alternative characterization of the central notion of cointegration, exploiting the relationship between the autocovariance and the cross-covariance functions of the series. This characterization leads us to propose a new estimator of the cointegrating parameter based on the instrumental variables (IV) methodology. The instrument is a delayed regressor obtained from the conditional bivariate system of nonstationary fractionally integrated processes with a weakly stationary error correction term. We prove the consistency of this estimator and derive its limiting distribution. We also show that, in the I(1) case, with a semiparametric correction simpler than the one required for the fully modified ordinary least squares (FM-OLS), our fully modified instrumental variables (FM-IV) estimator is median-unbiased, a mixture of normals, and asymptotically efficient. As a consequence, standard inference can be conducted with this new FM-IV estimator of the cointegrating parameter. We show by the use of Monte Carlo simulations that the small sample gains with the new IV estimator over OLS are remarkable.
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Bibliographic InfoPaper provided by Universidad Carlos III de Madrid in its series Open Access publications from Universidad Carlos III de Madrid with number info:hdl:10016/2567.
Length: 674 p.
Date of creation: 2002
Date of revision:
Publication status: Published in Econometric Theory (2002) v. 18, p.646-672
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Web page: http://www.uc3m.es
Other versions of this item:
- Marmol, Francesc & Escribano, Alvaro & Aparicio, Felipe M., 2002. "Instrumental Variable Interpretation Of Cointegration With Inference Results For Fractional Cointegration," Econometric Theory, Cambridge University Press, vol. 18(03), pages 646-672, June.
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- Mauro Costantini & Roy Cerqueti, 2007. "Non parametric Fractional Cointegration Analysis," ISAE Working Papers 78, ISTAT - Italian National Institute of Statistics - (Rome, ITALY).
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