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Speed of Adjustment in Cointegrated Systems

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Author Info
Fanelli, Luca
Paruolo, Paolo

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Abstract

This paper considers the speed of adjustment to long-run equilibria, in the context of cointegrated Vector Autoregressive Processes (VAR). We discuss the definition of multivariate p-lives for any indicator of predictive ability, concentrating on cumulated interim multipliers which converge to impact factor for increasing forecasting horizon. Interim multipliers are related to autoregressive Granger-causality coefficients, structural or generalized cumulative impulse responses. We discuss the relation of the present definition of multivariate p-lives with existing definitions for univariate time series and for nonlinear multivariate stationary processes. For multivariate (possibly cointegrated) VAR systems, p-lives are functions of the dynamics of the system only,and do not depend on the history path on which the forecast is based. Hence one can discuss inference on p-lives as (discrete) functions of parameters in the VAR model. We discuss a likelihood-based approach, both for point estimation and for confidence regions. An illustrative application to adjustment to purchasing-power parity (PPP) is presented.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 9174.

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Date of creation: Jun 2007
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Handle: RePEc:pra:mprapa:9174

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Related research
Keywords: p-life; speed of adjustment; impact factors; vector equilibrium correction; shock absorption.;

Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
F31 - International Economics - - International Finance - - - Foreign Exchange

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  8. Paolo Paruolo, 2006. "The Likelihood Ratio Test for the Rank of a Cointegration Submatrix," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 68(s1), pages 921-948, December. [Downloadable!] (restricted)
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